Commodity price fall provides room to cut policy rate: ICRA
Based on a relatively more benign outlook for inflation and the current account deficit following the recent moderation in commodity prices, as well as the continuing sluggishness in investment activity and domestic consumption sentiments.
Based on a relatively more benign outlook for inflation and the current account deficit following the recent moderation in commodity prices, as well as the continuing sluggishness in investment activity and domestic consumption sentiments, ICRA expects the Reserve Bank of India (RBI) to reduce the Repo rate by 25 basis points (bps) during the Annual Policy Review in May 2013, with a high likelihood of another 25 bps cut in the policy rate during the remainder of CY2013.
ICRA expects the persistence of retail inflation in excess of 10 percent would keep inflationary expectations elevated, which would remain a key concern. Given the moderation in prices of some industrial inputs and weakening pricing power, ICRA expects core WPI inflation to remain moderate at 3.5-4.0 percent over H1FY14, unless demand pressures resurface. In line with the recent easing of commodity prices, ICRA has revised its forecast for WPI inflation for 2013-14 to around 5.7-6.2 percent from 6.0-6.5 percent. An easing incremental credit-deposit ratio in Q1FY14 (in line with seasonal trends) and a pickup in spending by Government of India (GoI) would ease pressures on liquidity. However, the net bond issuances of Rs. 1.52 trillion planned to be undertaken by GoI in Q1FY14 (~19 percent higher than the level in Q1FY13) could exert pressure on liquidity. Nevertheless, in ICRA’s view, a reduction in the cash reserve ratio (CRR) seems likely only in the event of a sizable external shock. In ICRA’s opinion, the deposit growth for FY14 is likely to remain moderate in FY14 at 13.50 percent-14.50 percent as interest rates soften. While monetary policy is likely to be accommodative to support economic growth, moderate deposit growth and the low likelihood of further CRR cuts would curtail the pace of monetary transmission to an extent in H1FY14. A meaningful revival in industrial and investment activity remains paramount for an improvement in credit growth from the level seen in FY13. Given the expectation of limited softening of lending rates in the economy and the substantial Government borrowing programme, we expect a credit growth of 15-16 percent in FY14. While the dispersion of rainfall, both geographical and temporal, remains critical, the likelihood of a normal monsoon in line with the forecast released by the Indian Metrological Department suggests that consumption demand for various products as well as rural construction may display an improvement in H2FY14. Notwithstanding the incentives for merchandise exports announced recently, mixed trends regarding the growth outlook for various parts of the global economy suggest a restrained growth of merchandise and services exports in the current fiscal. Moreover, the competiveness arising from a weaker Rupee continues to be eroded by the high cost of generating captive power in light of insufficient availability of power from the grid in various parts of the country. Factoring in a normal monsoon; average WPI inflation of around 5.7-6.2 percent in 2013-14; and monetary easing of around 25-50 bps during the remainder of 2013, ICRA continues to expect GDP growth to improve somewhat to 5.8-6.0 percent in 2013-14 from 5.0-5.2 percent in 2012-13.As large Advanced Economies such as the United States, Japan and the Euro Zone continue to pursue loose monetary policies, FII flows into emerging markets may not be impacted significantly, as the global macroeconomic outlook remains mixed. The outlook for FII flows into domestic debt markets remains favourable given the benign global interest rates while yields on domestic treasury bills, G-sec and Corporate bonds are expected to remain attractive to the investors in the near-to-medium term, in spite of the easing across the yield curve in recent months. Further, the reform initiatives taken by GoI to improve corporate debt market by reducing transaction costs, access to derivative segments and relaxation of investment ceilings / lock-in could encourage portfolio investments. Volatility in the exchange rate of the Rupee is expected to persist, reflecting various domestic factors (such as the pace of reforms, magnitude of current account deficit) and global factors (European crises, liquidity conditions, risk aversion etc.), which would impact ECB hedging costs for Corporates. Moreover, the anticipated softening of domestic interest rates over the course of 2013 is expected to limit the attractiveness of funding through ECBs. In ICRA’s opinion, the FCCB route to raise overseas funds is unlikely to turn attractive in the near term.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. 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!
