Expect RBI to be cautious in further monetary easing: CARE

CARE Ratings has come out with its report on "RBI's mid-quarter monetary policy review-March 2013". According to the rating agency, with policy expressing concerns over the prevailing risks to growth which includes high food and CPI inflation; RBI is expected to be cautious in further monetary easing.

In line with expectations, RBI in its Mid-Quarter Monetary Policy Review has announced cut in the repo rate by 25bps for the second time since the start of the year in order to aid the process of growth, provided banks do pass on this benefit.

This move was on account of:

- Firm commitments of the Finance Minister to achieve fiscal targets in FY13.
- Credible projected fiscal path for FY14
- Moderation in core inflation levels and
- A slowing economy that requires a monetary push.

However, with policy expressing concerns over the prevailing risks to growth which includes high food and CPI inflation; RBI is expected to be cautious in further monetary easing.

On the policy front:

Cash reserve ratio (CRR) unchanged at 4.00 percent

Policy repo rate under the liquidity adjustment facility (LAF) reduced by 0.25 percent to 7.50 percent

Accordingly, the reverse repo rate remains 1 percent lower than the repo rate at 6.5 percent and the marginal standing facility (MSF) rate remains 1 percent higher than the repo rate at 8.5 percent.

As overall growth has declined to its slowest pace in a decade majorly on account of slowdown in service sector growth due to unfavourable global conditions, RBI has gradually shifted its policy stance from targeting inflation with monetary tightening regime to supporting growth by further easing its monetary policy.

However, inflation concerns on the other hand have accentuated. WPI inflation rose slightly in February reflecting upward revision of fuel prices while the core inflation continued its softening trend. On the other hand retail inflation continued with its upward trend in double digits in the past three months reflecting price pressures from food items. Hence, the increasing wedge between WPI and CPI has exacerbated the challenge for monetary management.

Going Forward - Growth
RBI has clearly reiterated its shift in focus to boost growth through monetary easing. The policy stance also emphasises on addressing the growth risks which indicates limited scope for further monetary easing. However, the government plans to borrow Rs 3.49 lakh crore - about 58 percent of the total borrowing - in the first half (April-September) of FY14. This should enable relatively stable liquidity conditions to prevail during the first half of the year.

For the rest of the calendar year, 50 bps point reduction in key policy rates is likely provided inflation conditions stabilize. This is expected to be done gradually in tranches of 25 bps each depending on how the inflation moves in the meantime. The Annual policy is more important from the point of view of the growth and inflation projections made by the RBI which will guide further monetary policy conjectures.

Disclaimer: This report is prepared by the Economics Division of Credit Analysis & Research Limited [CARE]. CARE has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE (including all divisions) has no financial liability whatsoever to the user of this report.

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