Expect 50 bps policy rate cut in H2FY13: CARE Ratings
CARE Ratings has come out with its report on "Monetary Policy Review - Q1 FY13". As per the rating agency, 50 bps reduction may be expected during the H2 FY13 provided inflation moves down.
July 31, 2012 / 19:23 IST
CARE Ratings has come out with its report on "Monetary Policy Review - Q1 FY13". As per the rating agency, 50 bps reduction may be expected during the H2 FY13 provided inflation moves down.
The RBI today announced its First Quarter Review of Monetary Policy for 2012-13. The policy stance announced therein entails no change in key policy rates.On the policy front -- Repo rate retained at 8%, consequently no change in reverse repo rate at 7% and marginal standing facility (MSF) rate at 9%
- CRR retained at 4.75%
- Reduction in SLR of scheduled commercial banks (SCBs) from 24% to 23% of their net demand and time liabilities (NDTL) with effect from the fortnight beginning August 11, 2012
On the macro-economic front –GDP growth projection for FY13 revised downwards from 7.3% to 6.5%, consequent on -- Deceleration in industrial growth and services sector activity
- Deficient and uneven monsoons, which would negatively impact agricultural output
Projection for baseline WPI inflation by March-end FY13, scaled upwards from 6.5% to 7.0%, driven by increase in -- Food prices
- Input costs
- Administered prices on some items such as coal
Impact of PolicyThe policy stance of the RBI is largely impact neutral.- Retention of Repo rate and CRR - Expected
The retention of key interest rates has been in line with expectations as inflation, which has been the target of the rate hike monetary policy tool continues to remain elevated with upward pressures expected to persist in coming months. While core inflation has been brought down to the 5% mark, the threat of higher input costs pushing up prices in this segment cannot be ruled out. Structural imbalances in the domestic economy with regard to demand-supply dynamics are adding to constraints in anchoring inflationary expectations and capping acceleration in the same. Furthermore, global food and commodity prices, especially crude oil prices are registering uncertain trends as global recovery takes a setback.Targeting of inflation would continue to remain the focus of monetary policy stance, despite visible slowdown in growth.- Reduction in SLR – Positive Surprise
The reduction in SLR by 100 bps to 23% of NDTL may be perceived as a positive move, in terms of provision of additional liquidity to the banking system and impact on profitability of banks. As liquidity has registered signs of easing in the past few months, the direct impact of this move is expected to be marginal. However, this reduction is expected to provide additional liquidity to banks which are on the threshold of SLR ratio of 24% and require funds for providing credit. This may aid financing of working capital, thereby boosting both investments and productive activity in the private entrepreneurial circle, especially the manufacturing segment.It may be noted however, that SCBs currently already maintained an investment-deposit ratio of 30.5%, which is well above the prescribed requirement. Hence, this move of SLR reduction to 23% could positively impact only banks that are on the margin (maintaining 24% SLR earlier).ExpectationsGiven the stance adopted, our expectations around the three points of concern raised by the RBI are as follows –- No change in policy rates in Q2 FY13 monetary easing would be governed by inflation dynamics rather than growth. 50 bps reduction may be expected during the H2 FY13 provided inflation moves down
- Upside risks to inflation are high and headline WPI may be expected to be 7.5%-8% by March-end FY13
- Downside pressures to growth might cause GDP growth to slide below the projected growth rate of 6.5%.
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
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
