RBI has a window for 25 bps cut: Analysts

The Reserve Bank of India (RBI) may cut the lending rate by 25 basis points (bps) in the mid-quarter review of its monetary policy on Tuesday, analysts and some bankers said. Finance Minister P Chidambaram on Monday made a case for the RBI to cut policy rates, and the central bank should take comfort from the government's efforts to cut the fiscal deficit.

The bankers point out that the poor incremental credit growth along with comfortable core inflation are making a strong case for the RBI to cut repo rate by 25 bps, currently at 7.75 per cent. However, they caution that the RBI might take a `wait and watch’, where it could effect a cut at the annual monetary policy review in May and possibly one more policy cut by September.

Indian banks are witnessing a muted pick-up with the total credit growing as low as 0.1 per cent month on month (MoM) (period ended January 31). While growth continues to be driven by large industries, trade services, NBFCs and retail, segments like mid-corporate and SMEs continue to see weakness in credit off-take.

The significant slowdown in the growth momentum raises a lot of concern especially with the substantial slowdown in the services sector, which had been the prime driver of growth of the Indian economy.

“While there has been an uptick in the IIP data for January, the overall growth is likely to remain in a consolidation phase till July before reviving. The subdued growth, waning of the core inflation and the government's commitment to bring down the fiscal deficit does provide some space for the further easing of the policy rates,” said Arun Singh, Senior Economist, Dun & Bradstreet India.

The tone of the policy guidance is unlikely to change significantly from the previous policies and monetary easing would depend on future data estimates, particularly of inflation, given that the retail inflation rate has been in double digits for three months, said the analysts.

Singh said the effective transmission of the monetary policy is required for credit off-take to increase.

However, unlike the analysts, the bankers are divided over the likely course of action RBI Governor Subbarao could adopt. The uncertainty stems from the fact that the CPI inflation for the month of February, 2013 is at a firm 10.90 per cent against 10.79 per cent a month ago.

WPI inflation for the same month has surprised to the upside printing in at 6.84 per cent against consensus expectations of a fall to 6.54 per cent from 6.62 per cent a month ago. Meanwhile, industrial production for January came in stronger than expectations, at 2.4 per cent (-0.5 per cent month ago).

The WPI inflation has been stronger than expected for February as the upside has largely come from an unanticipated jump in LPG prices and an overdue correction in diesel prices, explained Abheek Barua, Chief Economist, HDFC Bank, in a research note.

Along with the improvement in the trade deficit last month (the trade deficit improved from $ 19.9 billion in January to $14.9 billion in February), it is likely that the RBI could reciprocate the government’s initiatives and deliver a 25 bps repo rate cut, said Barua.

Abhishek Goenka, Founder and CEO, India Forex Advisors, said “ The chances of a rate cut at the upcoming mid-quarter policy review still seems difficult though even though we have seen positive data in recent times’’.

He said the rupee has already appreciated by more than 2 per cent against the dollar in the past two weeks. “But in case we do not see any cuts then we might see a significant fall in stocks and rupee, ” he said.

(Edited by Prem Udayabhanu)

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