RBI Credit Policy: Here's when Subbarao will start cutting rates

Moneycontrol Bureau

The Reserve Bank of India (RBI) Tuesday kept key policy rates unchanged for the second time since June, saying lowering them would raise the inflationary pressure.
In the first quarter review of monetary policy, the central bank kept the repo rate, the rate at which it lends to commercial banks, unchanged at 8%. The reverse repo rate, the rate at which the apex bank borrows money from commercial banks, was also stayed unchanged at 7%.
Nomura's economist Sonal Varma says the momentum of growth in India has slowed so substantially that the marginal tinkering in the interest rates are not enough. However, she adds that the big cuts in interest rates will not come in until we see inflation expectations clearly subside. “Our view is that the first hurdle of the next 25-50 bps rate cut may be met somewhere in the second half of fiscal year, but the big hurdle as of now, there is no visibility on when we will see the big cuts," she told CNBC-TV18 in an interview.
India's economy is likely to grow below 6% in the first half of the 2012-13 fiscal year, the finance ministry's outgoing chief economic adviser Kaushik Basu told reporters on Tuesday.
Asia's third-largest economy grew at an annual 5.3%, its worst pace in nine years, in the last quarter of the fiscal year that ended on March 31, weighed down by a combination of policy inaction, high inflation and interest rates at home and a lingering global uncertainty.
"The primary focus of monetary policy remains inflation control in order to secure a sustainable growth path over the medium-term...lowering policy rates (now) will only aggravate inflationary impulses without necessarily stimulating growth," Governor Subbarao said in the first quarter monetary policy review.
However, the pro-growth lobby, which is worried over the growth slipping to nine-year low of 5.3% in the January-March quarter, wanted RBI to bring down the high-rate structures to induce faster economic expansion.
RBI has refused to give-in to the demands, saying that "in the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth".
According to Jahangir Aziz, chief economist at JP Morgan, the governor has put the onus on the central government. "The multiple hindrances or multiple bottlenecks to supply side of the economy and to address the twin deficits, which I am guessing is euphemism for bringing down the fiscal deficit or at least containing it close to the budgetary level of 5.1%. It means a hike in diesel prices and it means FDI in retail, because that’s the only government solution that's floating around about how to ease supply constraints," he said.
If the government delivers on these two, then Aziz said, the Reserve Bank will cut rates. "The Reserve Bank, in that case, will argue that look the government is taking steps to bring down near-term demand and that’s good for inflation. At the same time, it is trying to bring down medium-term inflation by easing supply constraints. Therefore, the RBI is willing to respond to that. That was pretty clear from his statement. That was pretty clear from his June statement too. So I think rate cut at this point in time is a decision that the government will have to take. Will they provide the kind of space that the RBI needs to do the rate cuts? If the space is provided I think the RBI will cut rates," Aziz told CNBC-TV18.