RBI may cut 100 bps for FY13: Aditya Birla Money

Aditya Birla Money has come out with its report on the recent macro economic developments. According to research firm RBI may mostly cut around 100 bps for FY13 in a gradual manner as it wants government to focus on fiscal consolidation.

Core sector grew by 0.50 % in January 2012, its lowest pace in three months, compared to an expansion of 6.30 % in Jan 2011. It grew by 3.10 % in the previous month (revised upwards to 4.60 percent). Fall in January growth was due to across the board contraction in steel, crude, natural gas and refinery products, meanwhile electricity, fertilizer, coal and cement grew at a robust pace.

As core sector constitutes 37.90 % weightage in IIP, it is most likely that IIP for January 2012 is expected to be weak and we estimate it around -2 to -4 %.

This fall in core industry growth wipes out any revival in Industrial Production, which has already been hit due to policy inaction, high interest rates and global economic slowdown. Any improvement in Industrial production can be only through policy reforms, lowering of interest rates, government thrust on infrastructure spending and structural reforms.

Q3 GDP:
Third quarter GDP for FY 12 grew by 6.10 % lower than the market expectations of 6.25 % and lower than Q3 of FY11 & FY 10(8.30 and 7.30 percent) respectively. Sectors which contributed to growth in this quarter were electricity, construction and the services sector whereas manufacturing, mining and agriculture sectors contracted compared to Q3 of previous year.

Services sector which has been supporting the growth so far is not expected to grow rapidly as before and manufacturing, mining sectors are yet to show any signs of revival due to several reasons such as sluggish global economic growth, policy inaction and high interest rates. On the expenditure side, private final consumption expenditure continues to remain constant but gross fixed capital formation (GFCF) which is a major indicator of investments is slowing down as investments and new projects are not picking up. GFCF in Q2 (30.50) of this year has contracted significantly from Q2 (34) of previous year and is a cause of concern.

With Core sector and GDP data being disappointing, Q4 GDP has to grow above 7% to achieve 6.90% for FY12, which looks unlikely as weakness persists (domestic and globally) and most data points towards a slowdown in the economy. Equities have rallied by over 15% this year and investors should be cautious at this point of time as there are high expectations of a reformist budget and quick fall in interest rates etc.

Government on the macro front is facing problems with twin deficits (fiscal deficit at 5.60 %, current account deficit at 3.70 % for FY12), rising crude prices, low IIP, fall in investments, fall in tax collections. RBI is not expected to cut rates drastically like in 2008 (from 9.00 % to 4.75 % within a span of 10 months) and may mostly cut around 100 bps for FY13 in a gradual manner as it wants government to focus on fiscal consolidation.

Equity markets which rose by 250 points in the morning has given up most of its gains to trade at 17,770 levels currently. Investors should be cautious at this point of time and wait till the budget to take any investment decisions.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment

Read More