Credit Policy: Can RBI revive growth without stoking inflation?

Moneycontrol Bureau

For the first time in three years, the Reserve Bank of India has left signs on the market’s doorstep that 25 basis points repo rate cut to 8.25% is likely to take place today.

Around noon today or before that 11:10 am we will know what the RBI governor has on his mind for the rest of the year. CNBC-TV18’s managing editor Udayan Mukherjee takes a dovish tone when he says that a rate cut of 25 or 50 basis points, while it may be okay for investors, it won’t change the course of the Indian economy. “If we don’t get a rate cut then the market can head down to 5,100 but if we do get one then it can go to 5,300 and we might see some profit taking at those levels.”

The central bank is stuck between a rock and a hard place. As moderating inflation has opened a window to loosen interest rates, the central bank has said that inflation remains a concern, a sign that it won't cut rates too steeply in 2012. Even as inflation and rising prices moderate these domestic headwinds continue to remain worrisome nonetheless.

Yesterday’s inflation numbers showed that wholesale prices rose 6.89% YoY in March, staying below 7% for the third consecutive month, and well off last year's highs. 

The central bank has raised rates 13 times in the past two years to combat inflation. But these high rates have been a dampener to the country’s investment cycle.

Sangeeta Purushottam, managing director of Nine Rivers Capital says the economic scenario is challenging and unless and until there is a strong reduction in inflation, she doesn’t think any future cuts are going to be very aggressive. “I see 25 bps as a temporary relief and a temporary sentiment booster. We still need to live through the rest of the year and see whether the balance of the macros pan out.”

The RBI in its Macroeconomic and Monetary Development Report cautioned that inflation is likely to remain ‘sticky’ at the current level throughout FY13. Inflation was 6.89% during March, while growth during 2011-12 declined to a three-year low of 6.9%. The government, however, has pegged it at 7.6% for the current fiscal.

The RBI’s Forecasters' Survey shows the average inflation number to be at current levels and pegs growth at 7.5%, 10 basis points below the government’s projection for the fiscal. But the survey warned that waning pricing power will keep inflationary pressures under check.

Robert Prior-Wandesforde, Head of India & South East Asia Economics, Credit Suisse says inflation has come off, particularly the core rate. “It’s down to 4.7%, now it’s fallen 3.5 percentage points over the last four months and I think it’s going to fall further given the weakness in metal price inflation for example that we were seeing.”

Cautious rate cuts, however, will be the order of the day, say market analysts.

Chelsea Saldanha
chelsea.saldanha@network18online.com