RBI may cut CRR by 50 bps in March, repo rate in Apr: UBS

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Even though January inflation slowed down at an impressive rate, the central bank's worry does not end there. Liquidity crunch in the system still continues and the Reserve Bank of India will have to address that while inflation too isn't much at a comfortable level.

Philip Wyatt, Economist, UBS is expecting the RBI to cut cash reserve ratio (CRR) by 50 basis points in its March credit policy review. In an interview to CNBC-TV18 he said, "The last WPI rate gives the authorities the green light to ease. We are looking for a 50 bps cut in the CRR at the March meeting and a 50 bps cut in repo rate in April."

The RBI may cut CRR again post March if liquidity crunch continues, he pointed out. On a positive note, Wyatt is hoping that gross domestic product (GDP) will see a growth of 7.3% in FY13.

The central bank had a 20-month tightening cycle that ended in October. Headline inflation slowed to its lowest level of 6.55% (MoM) in more than two years in January, as food prices fell, increasing the pressure on the central bank to cut rates to battle the country's economic slowdown.

Below is the edited transcript of Wyatt's interview with Udayan Mukherjee and Mitali Mukherjee of CNBC-TV18. Also watch the accompanying video.

Q: What are you expecting from the Reserve Bank in the next couple of meetings in March and April?

A: We think that the last WPI rate gives the authorities the green light to ease. We are looking for a 50 bps cut in the CRR at the March meeting and a 50 bps cut in repo rate in April.

Q: There was some trepidation about the pace of cuts that we would see this year given the global setup and what was happening domestically as well. How sharp do you think the rate decreases will be through the course of this year?

A: That's still a fairly open question. It's not just dependent on the state of the Indian economy but also global conditions. We are going through the bottom of the industrial cycle. The recovery could be uneven and in any case we have a fairly moderate GDP recovery this year wherein we are expecting around 7.3% for 2012-13. Bringing that together, we think that the scope for rate cuts is no probably no more than a 100 bps or thereabouts frontloaded into the early part of the year.

But it could be expedited or followed up by more reserve requirement cuts if there is a more serious liquidity squeeze globally. We have a benign outlook for global growth, but clearly there are still risks connected with EU debt resolution, Greece and the monetary policy by the ECB. All these factors can combine to create a bump in the road for liquidity conditions.

In India's case specifically although they have had a fairly strong rally in the equity market there are a couple of factors, which make it little vulnerable for example official foreign exchange reserves have been coming down. Overnight interest rates are still high. The Reserve Bank is still needing to inject quite a lot of funds into the interbank markets to keep things stable. We think that's going to reverse and change in the quarters ahead, but we are still in a fairly vulnerable point.

Q: At this point would your GDP growth target have a downward bias in that case?

A: No, I don't think so. It appears to us from the data that December and March quarters could well turn out to the weakest. For India's fiscal year pattern that translates into a slower year in 11-12 and a stronger one in 12-13.

There are downside risks, but you need to pencil in a more negative view per se the US than we currently have. With all benign global view, 7.3% or thereabouts growth should be comfortably achievable.

Q: What is your take on global commodities and what this wave of global liquidity could end up doing to global commodities and therefore to inflation through prices of crude back in India?

A: Well, that is a very important wildcard. Certainly, many views of a lower inflation in India in the year just passed were scuffed by path of oil prices and the problems in the Middle East. This could come back to haunt us this year. But UBS currently has a fairly moderate outlook for Brent crude. We are looking for around USD 105 on average a barrel.

On that basis, even a more negative outlook where the Indian rupee weakens back down to 52-53, which I would doubt and stays there. If that happens then you can still have a favorable base effect coming through in the fuel part of the WPI. That's a fairly key statistical positive effect, which is yet to play out.