RBI Credit Policy: Caution on inflation, comfort on growth bearish for market

Moses Harding
IndusInd Bank

RBI delivered to expectation on policy rates, and not delivering CRR cut is not relevant to markets with option to release liquidity through Bond/USD purchases. RBI has already absorbed excess dollar supplies (to release rupees) on recent rupee rally from 55.15 to 53.90. RBI has ensured to retain post-policy price stability through its neutral stance on the way-forward. There are no signals of its comfort on inflation or concerns on growth! The balancing act between growth-inflation dynamics continues to be on stage!

The cues into the way forward are mixed. RBI has chosen to avoid sending bullish signals at this stage. The die-hard bulls expected RBI to exhibit its comfort on inflation and concerns on growth. So, bulls are disappointed. On the other hand, RBI has retained the declining interest rate cycle creating space for 25-50 bps rate cut before June 2013. This should provide comfort to bulls absorbing excessive weakness from now on.

Over all, there is no shock or awe feeling post-policy as RBI continues to watch developments in global and domestic factors to shift bias from inflation to growth! It is worry that RBI is not yet prepared to walk along with the FM despite best efforts to dilute risks (on inflation) from policy reforms, fiscal consolidation and Current Account deficit. RBI is doing its bit to dilute the risk on growth from monetary conditions; but given the large appetite, the dosage is not seen to be enough! Hence, the bearish set up on asset markets post-policy!

Markets are expected to stay in consolidation mode; NIFTY at 5650/5750-6000/6100; USD/INR at 53.60/53.85-54.35/54.60 and 10Y Bond at 7.80/7.83-7.92/7.95. The strategy is to absorb post-policy weakness into 5650-5750; 54.35-54.60 and 7.92-7.95 percent for possible near term rally into 6000-6100; 53.60-53.85 and 7.80-7.83.

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