The RBI had to choose between delaying the rate cut (to January-March 2013) maintaining its earlier stance of ruling out rate actions till headline (wholesale and retail) inflation stays at elevated levels keeping real interest rates low, and delivering the rate cut to support growth and to be seen with the Government during this crisis time. The choice was between reversal from its earlier stance and biting the bullet!
The "baby step" approach of delivering 25 bps CRR cut is not seen as firm monetary policy stance of RBI and highlights its cautious and indecisive stance, unable to choose between the cup and the lip! RBI has strong reasons to delay rate cut action; elevated inflation seen as major risk to growth, low real interest rates not hurting consumption and investments and downside risks to growth from supply side constraints.
On the other side, while the downtrend in headline inflation is seen as sustainable with good momentum into end of FY13, there is serious headwind to growth momentum in the absence of external support. The tight monetary policy since March 2009 is seen as extended one and it is time for reversal into pro-growth monetary stance. RBI can keep the system liquidity in deficit mode while delivering baby-step rate cut of 25 bps and move the operating policy rate from Repo to Reverse Repo rate on squeeze in the negative spread between Growth and headline inflation.
RBI firmly stayed with stated earlier stance and kept rates unchanged but with very positive guidance of being in preparedness for shift into growth supportive monetary stance. If inflation print continues to trend down into the next couple of months, there is high probability of rate action in January 2013. The preference of liquidity injection through OMO bond purchases (instead of delivering CRR cut) is seen as positive. When the system is holding above 5% of NDTL as excess SLR investments (net of drawdown from LAF/Repo counter), CRR cut will not be seen as monetary measure to support growth.
Over all, RBI did not opt to deliver pleasant surprise to the market through rate cut this time, and seen as disappointment to most stake holders including the Government. However, strong signals have emerged for rate reversal cycle starting from January 2013; risk factor to this expectation will be from elevated headline inflation. There is no guarantee of rate cut in January but the expectation in January-March 2013 is retained. The disappointment of the market reflected in post-policy price action driving the NIFTY down below 5840 and 10Y Bond yield into 8.15-8.18%. The bullish undertone and resultant rally is seen to be delayed but not denied!
(Contributed Moses Harding, head - ALCO and economic & market research at IndusInd Bank)
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