The Reserve Bank of India’s (RBI) policy guidance, unveiled as part of its Monetary Policy statement for 2013-14, has already begun lowering expectations of the analysts and markets, with many now ruling out any further rate cut in the June review and seeing only a slim chance of a cut in July. The 3 May repo rate cut of 25 bps was the third such lowering of the rate by RBI since January this year.
In a report released immediately after the policy statement, Tushar Poddar, Chief Economist at Goldman Sachs, says the forward guidance and the hawkish tone adopted by the central bank in its macroeconomic review of 2 May suggested that a rate cut is unlikely at the June 17 policy meeting.
“We also think that the probability of a cut in the July 30 meeting is also only slightly higher than 50 percent, given the RBI expects inflation to be softer over the next few months. Market expectations of more than three policy cuts over the next 12 months would likely be tempered in our view, given the RBI’s guidance,” Poddar says in his report.
The fact that RBI has now put the onus on boosting growth on the government has been noted by analysts and observers. RBI said recent monetary policy action, by itself, cannot revive growth. Easing supply side bottlenecks and fiscal consolidation were key elements of reviving the growth momentum.
“The RBI remains concerned about the current account deficit, and noted that risks on that account ‘could warrant a swift reversal of the policy stance’,” Poddar says.
In a report, ICICI Bank says the policy guidance is “fairly cautious with the RBI highlighting limited room for easing, amidst upside risks to inflation from supply shortages and fuel price hikes and with CAD above sustainable levels.” However, ICICI Bank does see room for only one more 25 bps rate cut in the June policy review. On the liquidity front, it sees open market operations (OMOs) to the tune of Rs 25,000-30,000 crore for the remainder of the first quarter of FY2014.
Dharmakirti Joshi, Chief Economist of CRISIL, has also ruled out any further rate cuts this year, unless inflation comes down at a faster-than-expected rate.
On its part, it sees 75-100 bps of cumulative rate cuts in 2013.
BP Equities says RBI has shifted its focus towards supporting economic growth by adopting a monetary easing policy. “However, in its policy review it has still maintained a cautious view for future monetary easing on back of slower economic growth, persistent inflationary pressures and rising threat from current account deficit. Also, the policy highlighted the importance of new investments in the economy for stepping up currently flagging aggregate demand and also to ease supply constraints. It focused on bridging the infrastructure gaps and correcting structural imbalances in other segments of the economy.”
Pointing to RBI’s own assessment on the economy and the fact that it has little headroom now left on rate action, Amar Ambani, head of research at India Infoline, said: “With 75 basis points already coming through from January to date, the RBI has front loaded its monetary policy action and the scope for any further cut is ‘little’ as the RBI itself puts it. The hawkish statement by the Governor reaffirms our belief. We expect not more than 25 basis points incremental reduction in repo till December 2013.”
Leif Eskesen, chief economist for India and ASEAN at HSBC, also points out that the room for further easing is limited given lingering inflation risks and the still high current account deficit. “Moreover, the supply-constrained economy is more in need of a further dose of structural reforms,” he says.
Corporate India, on the other hand, isn’t overtly pleased at the prospect of the monetary easing cycle coming to a gradual end. “A rate cut of 25 basis points, while welcome, falls short of CII’s expectation of a 50 bps cut in policy rates which was crucial under the current economic conditions. A 50 bps cut in policy rates would have provided a strong boost to the economy and made a significant impact on investor sentiment”, says Chandrajit Banerjee, Director General, Confederation of Indian Industry (CII).
Referring to the low growth rate – RBI has also lowered its own growth projection to 5.7 percent—Banerjee adds that the aggressive monetary policy stance, at the present juncture should not be perceived as overly accommodative, especially when growth is touching new lows. “Past experience also shows that the economy has responded favorably to cuts in policy rates. A cut in repo rate should have been accompanied by a cut in CRR which would have facilitated effective monetary transmission at a time when liquidity conditions are tight,” he adds.
However, given the RBI’s latest stance and guidance, India Inc’s position may have few takers among the decision-makers at Mint Road.