Does RBI macroeconomic survey suggest a rate cut?

Moneycontrol Bureau

The macroeconomic survey released by the Reserve Bank of India (RBI) on Monday somehow poured cold water on the spurring market sentiment over policy rate cut. Many investors both in equity and bond markets were holding their breath for a 50 bps reduction in the repo rate, at which banks borrow funds from the central bank.

However, the banking regulator made enough references in the survey report, which suggests possible rate cut on the policy day (Tuesday, Jan 29).

"Going forward, if inflation continues to trend down, monetary policy could increasingly shift focus and respond to growth moderation. However, the exact policy path would be contingent upon the evolving dynamics of inflation and growth, the trajectory of monetary and credit aggregates and other macroeconomic and financial parameters," RBI said.

RBI last had cut its policy rate in April 2012. Since then, it has maintained a pause on policy rate so far because of inflation remaining above its comfort level and the lack of requisite adjustments to fiscal and current account imbalances.

In December, 2012; India's headline inflation rose 7.18%; the slowest pace in last three years. This added to the exuberance of investors, who are keenly looking for a policy rate cut after a gap of nine months. The 10-yr government bond (G-sec 2022) yield is current hovering in the range of 7.80-7.90%. It is below the repo rate at 8%, suggesting that cost of borrowings is likely to come down soon for Indian companies. On Monday, it closed at 7.86%.

The central bank, which had prioritized inflation over growth earlier, tweaked its stance since last three months. It continues to monitor the inflation demon while responding to growth moderation risks.

"Monetary Policy has responded to this evolving growth-inflation dynamics through calibrated easing. Even as elevated inflation and the twin deficits have severely restricted the space for further easing of the policy rate since April 2012, subsequent measures were directed towards ensuring adequate liquidity to facilitate a turnaround in credit deployment to productive sectors for supporting growth ," RBI said.

The Reserve Bank also infused liquidity of over Rs 1.3 trillion through outright open market operation (OMO) purchases during 2012-13 so far. At the same time, it decreased the cash reserve ratio by 50 bps so far in FY13 to infuse more than Rs 30,000 core liquidity into the banking system.

"Monetary policy in India has sought to balance the growth-inflation dynamics that included a frontloaded policy rate cut of 50 basis points (bps) in April 2012 and several liquidity enhancing measures. These included lowering of the cash reserve ratio (CRR) by 50 bps on top of a 125 bps reduction in Q4 of 2011-12 and the statutory liquidity ratio (SLR) by 100 bps in a bid to improve credit flows," the survey said.