Mar 15, 2012, 02.29 PM | Source: CNBC-TV18

RBI credit policy: April rate cut on anvil, deficit at 5.2% of GDP say experts

The market elicited a mild reaction to the credit policy announcement of no change in rates. Bond yeilds too did not move much. This highlights the fact that the market had already factored in the dovish stance of RBI this policy. "However, there are lot of pointers about what could be the most impoirtant factors to watch," say experts.

The market elicited a mild reaction to the credit policy announcement of no change in rates. The Sensex tanked about 135 points and the Nifty shed 50 points as an immediate response, and the Bank Nifty slipped 1.8%. Bond yields that were at 8.28% were not impacted much, currently at 8.31%, which highlights the fact that the market had already factored in the dovish stance of RBI in the March policy. 

Speaking to CNBC-TV18, Sonal Varma says that the policy, though a non-event for the market, brings out certain key factors to watch out for. “Firstly, it shows that fiscal deficit, rupee movement and global commodity prices too will play key roles in governing decision making with regard to policy rate changes hence-forth,” she says.

She brings to light that RBI’s tolerance for a slower growth has increased considerably. She nonetheless sticks to forecast that the rate cut should start in April.

Abheek Baruah, chief economist at HDFC Bank agrees that a rate cut in inevitable in April. “What has happened since December is that the RBI has created a window for itself based on decelerating core inflation and growth concerns for some rate cuts,” he says. “I don’t think the situation on the ground will change dramatically by April,” he says.

Sajjid Chinoy, Asia economist at JPMorgan belongs to the camp that doesn’t believe that a rate cut in April is inevitable. “Political constraints suggests that fiscal consolidation may not be sustained or credible, crude has gone up 15%, we haven’t spoken about the fact that global commodity prices have gone up 5% over the last few weeks and the pipeline price pressures in yesterday’s inflation print have increased sharply,” he points out. Chinoy thinks that this is an action replay of 2011.

“I think if crude were to rise further or there is consensus that the deficit projected tomorrow is not credible, there is no compulsion to cut rates in April,” he says.

With regard to the effect of the credit policy on the bond markets, Anant Narayan, managind director and regional head of fixed income & currency trading ( South Asia) at Standard Chartered Bank expects a bit of a sell-off. He attributes it to the market reading the statements to be a little more hawkish than expected.

“The focus on inflation and fiscal deficit, neither of which the market expects to improve dramatically over the next 2-3 months will have bit of nervousness in the market,” he explains. “However, we must remember that there isn’t any fresh supply due over the next couple of weeks, large redemptions are due in April-May when they come through,” he says. He expects to bond yields grow going ahead, but not over 8.40%.

While Varma of Nomura puts fiscal deficit number at 5.1% because revenues should surprise positively, Chinoy puts the figure between 5.2-5.3% of GDP. That translates to about Rs 5.5 lakh crore gross market borrowing.


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