As it happened: CAD key to policy stance; not giving ultimatum to govt, says Subbarao

Current account deficit (CAD) is very much on our dashboard, said D Subbarao. This year too CAD will not be substantially lower. "One of the variables that go into policy calculation, will definitely be CAD," he said.

On macro economic policy, it is a joint endeavor of the govt and the RBI. "This is not an ultimatum that we give to the government," he said.

On gold prices, Subbarao said a fall in prices will increase consumption demand but will bring down investment and speculative demand.

He further clarified that liquidity does not simply mean cash reserve ratio. "I can understand banks saying that but we all should understand it is more than CRR."

Based on the cumulative cuts in the last nine banks, Subbarao expects banks to cut rates.

Appreciate bankers' inability to cut deposit rate, says Subbarao

Inflation should range around 5.5 percent this year, said RBI Governor D Subbarao. It is after a long time that the figure is in striking distance of the threshold limit of 5 percent.

There are several risks, from exchange rate movement, oil price, to MSP to the inflation. It is keeping in view of this we said little space left for further easing, he said

"However, if the upside risks open up, we will ease further."

On bankers' concerns about monetary policy transmission he said, "We need to appreciate their concern about their inability to cut deposit rate, because we need to have enough savings in the economy."

Speaking about Ponzi schemes, RBI said its jurisdiction is small

The RBI's regulatory jurisdiction over non-bank finance companies is quite small, said D Subbarao.

"Many companies do not come under the purview of the RBI. Nonetheless, we have responsibility in educating and creating awareness. In meetings with State-level banking committees (SLBCs) these issues are taken up. On the RBI front, we have trained police force and panchayat officials about such Ponzi schemes.

Our endeavor is also to provide investment products under formal financial system," said Subbarao.

Revival likely in 2nd half; growth to be subdued in H1

The growth will pick up only in the second part of the year and remain subdued in the first half. Not dramatic revival expected, RBI Guvernor D Subbarao said today.

The revival is largely dependent on the normal monsoon and investment revival.

Industrial outlook survey showed that optimism level is low.

The RBI noted that India may have concluded FY13 with close to/below 5 percent GDP growth and forecast growth for the current year at 5.7 percent. He said investment revival is key for further momentum in growth since capacity utilisation has been weak while services have been pulled down due to weak global demand.

Minimum support price is also likely to go up. "There is suppressed inflation as the diesel price decontrol is yet to take off. Hence the guard on inflation," he said.

FM confident of 6 percent growth in FY14

The finance minister today remained optimistic about India's economic fundamentals and said growth in financial year 2014 will be 6 percent.

He also said stimulus rolled out after 2008 crisis resulted in stubborn inflation.

"Global economy is yet to recover fully from 2008 meltdown, and this slowdown has significantly impacted India," he added.

No signals yet as to whether your EMI will fall

Bankers were almost unanimous in saying that there is unlikely to be a rate cut as cost of funds still remain high due to the prevailing liquidity tightness.

Don't think RBI's rate cut will lead to pick up in credit growth:Bank body chief

At a post-policy press conference, bankers defended their action or inaction until now and said their asset liability committees (ALCO) will meet to review and take a call on whether to cut rates.

The rate cut is based on individual banks cost of funds, bankers said.

Axis Bank, ICICI Bank and SBI all said that it will be difficult to pass on the rate cut till cost of borrowing declines.

RBI increased rates eight times and how many times did it cut? asked Pratip Chaudhary of the SBI, the largest lender of the country.

When asked whether policy transmission has been adequate until now, he said there is nothing to transmit.

ICICI Bank's Chanda Kocchar further reiterated that deposit growth is not encouraging right now and that both lending and deposit rates will depend on cost of funds.

Scope for more rate cuts, if inflation comes down further: Finance Minister P Chidambaram

Despite RBI's hawkish tone which suggested a policy reversal in the second half of the year, finance minister P Chidambaram sounded a tad bit optimistic and said there was scope for further monetary easing if inflation comes down.

"RBI has indicated liberal Open Market Operations..Further policy action hinges on fall in inflation," he said.

Inflation to be brought down to give RBI more room, says Raghuram Rajan

Chief Economic Advisor Raghuram Rajan exuded confidence that inflation will be brought down, giving the RBI more room to ease the policy rates.

He, however, said energy price pass through may keep WPI temporarily high.

There may be room for CPI inflation to come down, he said, hoping food inflation to come down going forward.

He said India is getting growth back on track.

There is a case to pass on the rate cut to consumers, says Bank of India's M.S. Raghavan.

He added that the RBI policy has opened up a few challenges for banks. While provisioning changes are unlikely to impact on the bank's profitability, the increase in mark-to-market government securities holding could have a bigger impact on profitability, he said.

RBI is clearly more pessimistic than the government, said Montek Singh Ahluwalia after the central bank cut its growth forecast to 5.7 percent in FY14, against the PMEAC's 6.4 percent projection.

He said it is important for monetary policy to support growth and expected CAD to look better than last year.

According to Dalton Capital, RBI is assessing the situation taking into account the potential government decision on reforms. Meanwhile, the government puts out an estimate based on their conviction to roll out reform steps. The RBI probably thinks that the government is taking way too long tme to adress the fiscal issues. This could be a reason for the big difference in the growth estimates.

'Little space' doesn't mean no further cuts: Rangarajan

C Rangarajan, the chairman of the Prime Minister's Economic Advisory Council, termed the rate cut as a 'good decision' and added that growth is in early stages of recovery.

He, however, noted that further cuts depend on how inflation behaves going ahead. "Inflation needs to come down for further monetary easing."

" Little space" should not be read as no possibility of further cuts, said Rangarajan.

Policy reversal and RBI's guidance for economy is key

Key word is policy reversal, said UR Bhatt of Dalton Capital as the RBI in its policy review noted that "Monetary policy will also have to remain alert to the risks on account of the CAD and its financing, which could warrant a swift reversal of the policy stance."

Nomura expects another rate cut this year

Meanwhile, decoding RBI's statement, Nomura expects another rate cut as the Guvernor did not specifically say there is no space for more rate cuts.

" We are getting into uncertain, uncharted territory," said Sonal Varma of Nomura.

CPI is always going to stay high. That cannot be an excuse for the RBI to not cut rates, said Samiran Chakraborty, head of Research, StanChart India.

A Prasanna, Economist at ICICI Securities, too expects another cut in July provided inflation comes down.

"I think the RBI is still accommodating, and when they say there is little room to cut, it suggests there is one more cut, maybe not in the next policy review but possibly in July provided inflation continues to come down.

"I think the HTM (hold-to-maturity) cut is spaced out, maybe immediately it could be a little negative, but the way it is being implemented, I think the market should be able to absorb it. But with supply pressure in May, there could be some upward pressure in yields."

Radhika Rao, Economist at DBS, said the essence is that correction in inflation and current account position is more cyclical than structural.

"Caution should be exercised on both counts and that the central bank is unlikely to embark on an aggressive easing cycle if they are not convinced that the structural constraints have been addressed. Some sacrifice by way of slower growth seems inevitable then."

RBI hawkish, cuts repo rate by 25 bps, CRR unchanged

11:am The Reserve Bank of India today cut key repo rate by 25 basis point for a third straight time but left the cash reserve ratio unchanged as it looks to bolster an economy growing at a decade low.

The RBI trimmed the repo rate to 7.25 percent, its lowest since May 2011, and kept the cash reserve ratio (CRR) for banks unchanged at 4 percent, also in line with expectations.

Limited room for further easing

RBI Governor D Subbarao noted that there is limited room to ease monetary policy further as headline inflation remains above comfort levels. The central bank forecast March WPI inflation at 5 percent.

"The balance of risks stemming from the Reserve Bank's assessment of the growth-inflation dynamic yields little space for further monetary easing," the RBI wrote in its policy statement.

Upside risks to inflation still significant in near term

" Headline inflation moderated to 7.5 percent last year. We ended the year with WPI inflation of 6 percent. Although headline WPI inflation has eased by March 2013 to come close to the Reserve Bank's tolerance threshold, it is important to note that food price pressures persist and supply constraints are endemic, which could lead to a generalisation of inflation and strains on the balance of payments," the Reserve Bank said.

Markets, rupee extend losses post RBI review

The Sensex fell 0.72 percent to 19592, while the Nifty was down 0.89 percent at 5949 due to RBI's hawkish statement.

The central bank expects subdued GDP growth at 5.7 percent in 2013-2014.

"During 2013-14, economic activity is expected to show only a modest improvement over last year, with a pick-up likely only in the second half of the year. Conditional upon a normal monsoon, agricultural growth could return to trend levels. The outlook for industrial activity remains subdued, with the pipeline of new investment drying up and existing projects stalled by bottlenecks and implementation gaps," said the RBI in its policy statement.

CAD biggest risk to economy

Subbarao further noted that the current account deficit continues to be the biggest risk to the economy and that there is a likelihood of capital flight due to growth concerns in advanced economies.

The current account deficit swelled to a record 6.7 percent of GDP in the December quarter. While it is expected to ease on lower global commodity prices and a rise in exports, it is on track to remain well above the 2.5 percent level that is seen as sustainable.

"Should global liquidity conditions rapidly tighten, India could potentially face a problem of sudden stop and reversal of capital flows jeopardising our macro-financial stability," RBI said.

Some in the market had been hoping for more aggressive policy easing action and a less hawkish tone from RBI Governor Duvvuri Subbarao as India grapples with economic growth that slowed to about 5 percent in the fiscal year that ended in March, its weakest in a decade.

RBI may be hawkish but will cut rates this time round

The benchmark indices rose to three-month high on Thursday on hopes the Reserve Bank of India (RBI) will cut interest rates and provide a boost to the growth. But the central bank's macroeconomic report that was released after the market hours had an unexpected hawkish tone heightening concerns about its action today.

Will the stock market's enthusiasm be misplaced? Will the RBI play the party pooper?

Very unlikely. The RBI may be sounding hawkish but will cut interest rate this time round, the third such move this year.

Consider these factors: the growth is lagging at a decade low and the central bank itself doesn't see a major improvement in the situation. Wholesale and core inflation rates have been falling. A further relief is the decline in commodity prices which is also helping the current account deficit, which has been a major concern for the RBI.


The RBI has cut its benchmark rate by 25 basis points twice this year. Reuters

And above all, the pressure from the political and business communities to cut rates is so high that the central bank can't help listening to their cry for lower interest rates.

Thirty-seven of 42 analysts polled by Reuters last week expected the RBI to cut the repo rate by 25 basis points to a two-year low of 7.25 percent.

"They really want to provide support to economic activity," said Tuuli McCully, senior economist at Scotiabank, was quoted as saying in the Reuters report.

As many as 26 of 38 economists expected the RBI to leave CRR unchanged at 4 percent. The CRR is at its lowest level since 1976.

The RBI has cut its benchmark rate by 25 basis points twice this year, having earlier resisted calls from industry and the government to ease monetary policy for much of 2012.

India's headline inflation dropped to its lowest in more than three years during March, at 5.96 percent, while economic growth languished at around 5 percent in fiscal year 2012/13.

McCully said a key factor in the RBI's likely decision to cut rates will be the favorable trend in wholesale prices.

But, while the moderation in wholesale price inflation is supportive for a rate cut, the scope for cuts remains limited.

In its March review the RBI had warned that room for monetary easing was "quite limited" due to concerns over a widening current account deficit and a growing gap between retail and wholesale price inflation.

But there is a wide expectation that the central bank likely to sound more optimistic as far as the macroeconomic situation is concerned.

"I expect the RBI to sound a little more optimistic than it was in the March policy, but it will still hold its cautious guidance on the pace of rate cuts given that consumer price inflation is much higher than wholesale price index," said Sanjay Mathur, head of economic research for non-Japan Asia at Royal Bank of Scotland.

While consumer prices rose 10.39 percent in March, marginally easing from 10.91 percent in the previous month, India's current account gap hit an all-time high of 6.7 percent of GDP in the December quarter.

Precisely because of this, however, the contrary view is that there is no case for the RBI to cut rates now.

As argued in this earlier article in Firstpost, apart from the double digit inflation the pass-through effect of the fuel-price increases are yet to unfold fully as diesel price Iis being decontrolled in a staggered manner. (Read the full report here.)

So those at the bottom of the pyramid are yet to feel the real pain of the price rise pinch. When the RBI cuts rates now, it will only help the corporates and other businesses.

But, for the central bank, which has fought many a battle with politicians to retain the freedom to decide on rate action, there is now way out for the time being. It will have to cut the rate today, though its comments may temper expectations for further such moves this year.

With inputs from Reuters

Updated Date: Dec 20, 2014 18:22 PM

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