RBI keeps rates, CRR unchanged: Motilal Oswal

Motilal Oswal has come out with its report on RBI Policy. According to the research firm, RBI is expected to signal a decisive change in the direction of policy in Jan-13 with a 50bp rate cut. This would be followed by another 50bp cut in remaining CY13.

• RBI left the policy rates unchanged for the fifth time a row. Contrary to expectations it also kept the CRR unchanged at 4.25%.
• However, the outlook acknowledged the changing growth-inflation balance, the numerical assessment of which would be changed during Jan-13. Also, RBI guided for a rate cut in 4QFY13 as inflation for the last two months remained below its projected trajectory and various signs of easing have emerged.
• To give meaning to its current policy stance of topmost priority to liquidity, RBI needs to continue with further OMO of at least INR400b in view of LAF deficit exceeding INR900b during Nov-Dec 2012, touching up to INR1.5t recently.
• We now expect RBI to signal a decisive change in the direction of policy in Jan-13 with a 50bp rate cut. This would be followed by another 50bp cut in remaining CY13. We also expect a 25bp cut in CRR in Jan-13 policy to help the liquidity situation further.

• Policy rates left unchanged: As expected, RBI kept key policy rates unchanged (including Repo, Reverse Repo, MSF and Bank rate). Hence, Repo rate stands at 8.00%, Reverse Repo at 7.00% and MSF/Bank rate at 9.00%. Thus, after the Apr-12 policy rate cut of 50bp, this is the fifth time in a row that RBI paused on policy rates.
• CRR too left unchanged at 4.25% and SLR at 23%: RBI kept the CRR too unchanged at 4.25% against expectation (MOSL/Consensus - 25bp cut). The SLR ratio too was kept unchanged after the 100bp cut in Jul-12.
• Outlook points to reassessment of growth inflation balance: In RBI's assessment, GDP growth is evolving along the baseline projection of 5.8% set out in Oct-12 while excess capacity and easing international prices are expected to impart softening bias to inflation. RBI would update the formal numerical assessment of its growth and inflation projections for FY13 in Jan-13.
• Guidance for a rate cut in 4QFY13: RBI noted that inflation has been below its projected trajectory, and policy focus would shift to growth. This reinforces Oct-12 guidance about policy easing in 4QFY13. RBI also reiterated its stance of managing liquidity conditions to support growth. However, risks to inflation remain and accordingly, even as the policy emphasis shifts towards growth, the policy stance will remain sensitive to these risks.

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