Expert Views: RBI holds rates; shifts focus to growth

MUMBAI Tue Dec 18, 2012 11:52am IST

A man talks on his mobile phone as he walks past the logo of the Reserve Bank of India (RBI) inside its head office in Mumbai June 14, 2010. REUTERS/Rupak De Chowdhuri/Files

A man talks on his mobile phone as he walks past the logo of the Reserve Bank of India (RBI) inside its head office in Mumbai June 14, 2010.

Credit: Reuters/Rupak De Chowdhuri/Files

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MUMBAI (Reuters) - The Reserve Bank of India (RBI) left policy interest rates unchanged as expected on Tuesday, ignoring the growing clamour from business and politicians to lower them, and reiterated its October guidance of further policy easing in the March quarter as it shifts its focus towards boosting growth.

The central bank also kept the cash reserve ratio (CRR) unchanged at 4.25 percent, its lowest since 1974.

"In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards," the Reserve Bank of India wrote in its mid-quarter monetary policy review.

(For main story on RBI rate decision, click reut.rs/U5BxGN)

While the decision to leave the policy repo rate unchanged at 8.00 percent was in line with forecasts in a Reuters poll, expectations for a rate cut had grown slightly after data on Friday showed wholesale inflation cooled to its weakest pace in 10 months in November.

COMMENTARY

LEIF ESKESEN, CHIEF ECONOMIST FOR INDIA AND ASEAN, HSBC, SINGAPORE

"The Reserve Bank of India did not see a need to cut the cash reserve ratio at this point, which is a little bit of a surprise. But otherwise their action is in line with expectations.

"They have re-emphasized their earlier guidance of possible easing in the last quarter of the fiscal year. I think there is still limited room to cut rates. Structural reforms and a revival of investment in infrastructure would be needed to revive growth."

ARVIND CHARI, FIXED INCOME FUND MANAGER, QUANTUM ASSET MANAGEMENT, MUMBAI

"The lack of a CRR cut means that OMOs (open market operations) will continue, which is extremely supportive of bond prices. The text suggests that the January policy should see a repo rate cut, so it makes sense to continue to remain long bonds. We were a bit disappointed by not seeing a rate cut today. Given that the overall trend is towards easing, there was no major reason to wait for the January policy."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI

"While we definitely expected liquidity injection through more calibrated moves based on government spending, open market operations would still be the preferred route. So basically we are anticipating a rate cut in January by 25 basis points and in March by 25 bps and going into the next fiscal year, we are expecting 50-75 bps additional rate cuts.

"If the government keeps a very tight lid on spending in the rest of the fiscal year, we could see a CRR move, but given the sticky nature of government expenditure, it would still be the OMO route for liquidity injection."

RADHIKA RAO, ECONOMIST, FORECAST PTE, SINGAPORE

"Last week's sub-consensus November WPI had fanned speculation in some quarters that the RBI might lower the key rate today, though we reckon that a cut at this stage would have been premature given the scope for these prints to be revised higher in coming months.

"That said signs in softening RBI guidance is apparent as focus has shifted to growth and odds for a rate cut in Jan-March quarter is likely to gather considerable momentum here on. Barring a sharp acceleration in December WPI, we look for a 50 basis points reduction in Q1 2013, possibly front-loaded in the January meeting."

ANUBHUTI SAHAY, ECONOMIST, STANDARD CHARTERED BANK, MUMBAI

"The RBI has struck a cautious note even as it acknowledged moderation in inflation. We expect RBI to reduce repo rate by 25 basis points in Q1 2013 as moderation in the inflation trajectory is likely to be confirmed by then."

A. PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD, MUMBAI

"I think it's slightly more dovish than the October policy, driven by lower than expected inflation. They are still concerned about growth. My expectation is of cut in CRR and the repo rate by 25 basis points in January and another repo rate cut of 25 bps in March.

"They have said they will continue to provide liquidity and that implies OMO will continue. We expect another 500 billion rupees through OMOs until March.

"We are not sure about additional borrowing, because even if there is some slippage to the 5.3 percent fiscal deficit target, it can be managed through additional T-bills."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI

"In line with our expectations, the RBI did not ease monetary policy today citing elevated level of retail inflation. But the language has certainly become more dovish and the probability of a rate cut in January has gone up."

SHAKTI SATAPATHY, ANALYST, AK CAPITAL, MUMBAI

"Today's announcement was mostly in line with the previous tone of the policy. Given growth supportive fiscal stance taken in the recent days by the central government along with ebbing inflationary pressure from the coming months, the RBI would seek a proactive 50 bps repo cut in the January policy.

"With almost all the negativity priced in and continuation of timely OMOs, the government bond yields would be on a downward bias in the coming weeks."

ARUN SINGH, SENIOR ECONOMIST, DUN & BRADSTREET, MUMBAI

"Today's action shows the Reserve Bank of India's seriousness in fighting inflation. The ideal time for the central bank to cut rates will be the end of January, provided there are no surprises on the inflation front.

"I think there will be a 25 to 50 basis points cut in the repo rate in the March quarter."

UPASNA BHARDWAJ, ECONOMIST, ING VYSYA BANK, MUMBAI

"RBI's forward guidance seems fairly pro-growth, further reinforcing our view that the central bank will ease repo rate in the January meeting. We expect a total 50 bps rate cuts in the March quarter."

ANJALI VERMA, ECONOMIST, MF GLOBAL, MUMBAI

"The tone of the policy warranted a CRR cut. The liquidity deficit is about 3 percent of bank deposits. OMOs will most likely continue to come, but does not ease the liquidity situation much.

"I think the policy today reinforces a 25 bps repo cut in January. I expect 50-100 bps of cumulative rate cuts in 2013."

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI

"The policy is benign. I think the RBI will begin the easing cycle with a CRR cut in the January policy. The first rate cut will come in February-March and I expect cumulative 75 basis points of repo cuts by June."

ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK, NEW DELHI

"I had expected a CRR cut but there was no compelling reason to do so. Whatever the RBI spelt out in October seems to have got support from the inflation trajectory. Net of the base effect, we see the current trend continuing and a case for rate cut strengthening, which they could do in January.

"There is still some uncertainty on government's borrowing, and they could borrow additionally in the last quarter, which could create a situation of tight liquidity and RBI could save for a CRR cut until then.

"I think today's move reinforces the expectation of more open market operations, which is a bond positive."

ANEESH SRIVASTAVA, CHIEF INVESTMENT OFFICER, IDBI FEDERAL LIFE INSURANCE CO LTD, MUMBAI

"It's another disappointing policy against hopes of a CRR cut and a long shot of a rate cut, but RBI may act in January though.

"One good thing is markets are seeing buying at lower levels."

MARKET REACTION

* The benchmark 10-year bond yield fell 3 bps to 8.14 percent after rising 1 basis point to 8.17 percent immediately after the policy.

* The rupee trimmed gains to trade at 54.79/80 from 54.76/77 after the policy decision.

* The benchmark 5-year OIS rate rose 4 bps to 7.15 percent while the 1-year OIS rate firmed 6 bps to 7.67 percent.

* The BSE Sensex dropped 0.4 percent in a knee-jerk reaction after the policy. It had pared most gains and was flat just before the announcement.

BACKGROUND

- Wholesale inflation cooled to its weakest pace in 10 months in November, a sign the economy may finally be escaping a long period of price pressure and raising the chances of a rate cut in January.

- The wholesale price index-based inflation is expected to trend downwards in the next two to three months, Finance Minister P. Chidambaram said on Friday.

- A surge in manufacturing output pushed industrial growth to its highest in more than a year in October, a sign that Asia's third largest economy may have turned a corner, but economists said more data was needed to see if the pace can be sustained.

- India will speed up the sale of stakes in state companies to revive the stock market and will push ahead with reforms aimed at spurring an investment recovery in the flagging economy, Prime Minister Manmohan Singh said on Saturday.

- The government raised $1.1 billion selling a stake in miner NMDC Ltd (NMDC.NS) last week in a fillip for its efforts to rein in a widening fiscal deficit through sales of state assets.

- India's wide fiscal deficit and a heavy debt burden are the most "significant rating constraints" to the country's sovereign rating, Standard & Poor's said on December 11, reiterating its warning that India faces a one-in-three chance of being downgraded to junk over the next 24 months.

- The cabinet last week approved the creation of a special panel on Thursday with watered-down powers to speed up the notoriously slow implementation of big-ticket infrastructure projects.

(Reporting by India Treasury, Equities teams; Editing by Ranjit Gangadharan)

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