September 15, 2012 / 12:05 IST
Saikat Das
moneycontrol.com
The stock market has rallied over 400 points, cheering the government decision to hike diesel price by sharp Rs 5/litre and Ben Bernanke's decision to pump in USD 40 billion via bond purchases to improve the US economy. The rally is being driven by hopes that the Reserve Bank of India may have the leeway to cut rates, now that the government is taking steps to address the fiscal problem.
However, both the events do not warrant any immediate change in the monetary policy stance by the Reserve Bank of India (RBI). The 10-year benchmark government bond yield did not react much and trading at around 8.17% after the inflation figure came out. The banking regulator is likely to buy some more time before they actually go for policy rate cut. It is going to announce its mid-quarter monetary policy on Monday (September 17). In April, the central bank had last reduced the policy rate or repo rate by 50 bps to 8%. Repo is the rate at which banks borrow funds from RBI.
Inflation, a key concern and no rate cut….For RBI the high rate of inflation continues to be the top priority. Moreover, it will wait and watch for the government’s intention to continue with likely measures to revive the economy while boosting the investors’ sentiment at the same time.
"Diesel price hike is a positive step after a series of set backs," Shubhada Rao, chief economist,
Yes Bank told
moneycontrol.com.
"However, the government further needs to build in its supportive measures. It has to address two issues: fiscal consolidation and removal of supply side constraints. RBI is unlikely to react to government actions immediately. We expect 50 bps cut in the policy rate in the third quarter (October-December). Moreover, it is likely to maintain status quo on Monday."
Will inflation raise its ugly face?The wholesale price index (WPI) for the month of August rose to 7.55% compared to 6.87% recorded in July. A CNBC-TV18 poll had predicted August inflation at 7.06%. Both the latest events also make a case for rise in the rate of inflation.
"The suppressed inflation will now move upwards," said Brinda Jagirdar, general manger (Economic Research), the
State Bank of India (SBI).
"After the QE3, liquidity will be sloshing globally wherein prices of commodities will go up. Back home, the fuel price hike too will add to prices. However, it needs to be seen how much the government rolls back this time. If it does not, then, how the government carries out such likely measures going forward. It also needs to do something in pushing up investments. October-December quarter would be an opportune time for RBI to slash policy rates," she said adding that RBI might go for a cut in cash reserve ration (CRR), or the portion of deposits banks keep with RBI to ensure liquidity in the system. CRR is currently at 4.75%.
Dollar inflows and liquidity: According to Moses Harding, head of asset liability committee and economic research at
IndusInd Bank, RBI has already taken measures by cutting policy rates and reducing CRR. Unless the rate of headline inflation comes down below 6%, the comfort zone, it does not make sense for RBI to deliver policy rate cut.
"The regulator rather will focus on diverting demand for rupee credit to offshore funds. By bring more dollar inflows, RBI can make rupee appreciated beyond 55 level per dollar. For liquidity, RBI can manage it upto 75,000 to 1 lakh crore a day through OMOs," he said.
Liquidity remains comfortable. Going forward, according to a majority of bankers, it may pump in liquidity through open market operations (OMOs). Banks expect an uptick in credit demand from October onwards, the beginning of the busy season. Moreover, India Inc will require money in the second half of September on account of advance tax payments. Some bankers also do not rule out the possibility of a CRR cut (on Monday) to deal with liquidity.
saikat.das@network18online.com 
