Following the GDP release, the Governing coalition will no doubt put pressure on Governor Subbarao to cut rates, and judging by recent comments from senior RBI officials, a further move looks to be only a matter of time. This is despite the stickiness of headline wholesale price inflation (which moved back above 7% in April) and the strength of the CPI rate, which exceeded 10% in the same month. Quite rightly, it looks as though the Central Bank’s focus is turning increasingly towards growth and away from headline inflation measures at least.
The WPI inflation for the month of May rose to 7.55% as against the previous month’s figure of 7.23% and previous year’s corresponding month’s figure of 9.56%. Moreover the March inflation was revised upwards from 6.89% provisional to 7.69%.
Sonal Varma, Analyst, Nomura:
“We expect headline WPI inflation to remain above 7% due to elevated food prices (on a minimum support price [MSP] increase and the chance of below-normal rainfall) and an impending diesel price hike. However, we expect core inflation to remain subdued due to the lagged impact of a wider negative output gap and lower global commodity prices in Rupee terms. The key issue before the Reserve Bank of India (RBI) is whether to support flagging growth momentum, or tackle inflationary pressures due to a weak Rupee and high food prices. The government has also yet to play its part in tackling the fiscal deficit.
Our view is that the RBI will support growth by cutting the repo rate by 25bps on June 18 (and by a total of 50bp in 2012), but with no cut likely in the cash reserve ratio. Momentum in core inflation has not slowed sufficiently to warrant a 50bp repo rate cut, in our view”.
Dr. Shubhada Rao, Chief Economist, YES Bank:
“With leading indicators continuing to indicate significant loss of growth momentum, validated by the Q4FY12 GDP growth at a record low of 5.3% YoY and flat April IIP print, inflation data persisting to surprise on the negative side makes the task of a rate cut challenging for RBI. While inflation and its internal drivers will continue to be closely watched by the RBI, at this juncture, the tepid pace of investment growth, intensified global uncertainties and correction in crude oil prices, in our view, will provide RBI the grit to cut the repo rate by a measured 25 bps (with no CRR action) in its Mid-Quarter Monetary Policy Review on June 18, 2012.
We do not expect the RBI to alter the CRR next week; as systemic liquidity currently remains close to RBI’s level of guidance due to regular OMOs. Additionally, over the next 3-months, we expect a reversal in currency leakage due to seasonal factors, resulting in a liquidity infusion of close to ` 300 billion (approximately equal to a 50 bps cut in the CRR). As such there is no pressing need for a cut in the CRR as of now.
The RBI could continue using OMO on a regular basis to support liquidity and preserve CRR as a tool that could be deployed if financial market conditions worsen on the back of intensification of the Euro zone crisis”.
Moses Harding, Head - ALCO and Economic & Market Research, IndusInd Bank:
“We will set a 51% probability for 50 bps CRR cut and 25 bps rate cut and 49% probability for 50 bps CRR cut and 50 bps cut in Repo and Reverse Repo rate. Either of these actions will provide price stability in 10Y bond yield at 7.95-8.15%; 50 bps rate cut into the lower end and 25 bps rate cut into higher end; test/break either-way not expected to sustain. It would be painful if RBI delivers 50-75 bps CRR cut without rate cut or leave things unchanged. Therefore, there should be action with combination of CRR and policy rate and there is no case for delivery of aggressive rate cut without CRR cuts. Let us see what RBI delivers on 18th June? Will it play to the gallery (50 bps CRR cut and 25 bps rate cut) or stay conservative sticking to its primary role of containing inflation (50 bps CRR cut without rate cut) or play tune with the Ministry to support growth (50 bps CRR cut and rate cut)”?
Shah Investor’s Home (SIHL):
“With inflation still at an uncomfortable level of 7.55% for the month of May 2012 from up from 7.23% MoM, we believe it will be difficult for RBI to take decision on a rate cut in its mid-quarter monetary policy review scheduled on June 18, 2012. We believe RBI’s primary aim is Inflation control; hence to cut rates will be an extremely brave decision as industrial growth has slowed down to a great extent.
Further, the banks borrowing through LAF has declined in last two days from ` 852 billion (as per data released on June 12, 2012) to ` 705.20 billon due to RBI’s infusion of liquidity through OMO (` 112.07 billion) on June 12, 2012. Thus we believe there is not much a case for a CRR cut”.
Emkay Global Research:
“While core-inflation has remained at RBI’s comfort zone of sub-5% for consecutive three months, we continue to believe that the effective key tool for the RBI to tackle the growth slowdown (Q4FY12 GDP at 5.3%, April 2012 IIP at dismal 0.1%) will be OMO’s and cuts in CRR rather than a repo rate cut. The rate cut even if done in an environment of steep liquidity deficit (1.4% of NDTL) will not have meaningful bearing on the borrowing costs. Q1 is a lean credit period and hence the deficit may eventually rise to higher levels in coming quarters. Hence, we believe that even if rate cut is done in forthcoming mid-quarter review, as we progress towards the H2FY13, its impact on the interest rates will fade away. We also remain wary of 80bps upwards revision in Mar 2012 inflation at 7.7% (6.9% earlier)”.
Credit Suisse:
“Notwithstanding our slight reservations about the accuracy of the January-March figures, there is little doubt that the economy is expanding well below trend, which should bode well for a drop in inflationary pressures ahead. In any case, the RBI can point to the fact that its preferred measure of core inflation (manufacturing excluding processed food) is running below 5% y-o-y and, on our estimates, less than 2% on a three-month-on-three-month seasonally adjusted annualized basis.
We continue to look for another 125 bps of rate reductions. With all this in mind and given the weakness in international commodity prices, which has generally offset the sharp depreciation of the rupee, we continue to look for a consensus-busting 125 bps of rate cuts by the end of the current fiscal year in March-2013”.
Source: myiris & others
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