Experts see RBI moving to dovish stance and pausing hikes
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RBI to push back rate cut for now

The beginning of the Reserve Bank of India's policy rate cut cycle is expected to get delayed by a few months to the April-June 2012 quarter, mainly on account of inflation measured by the wholesale price index remaining above nine per cent level for November.

  • Mumbai,  December 15, 2011  
  • |  
  • UPDATED   11:02 IST

The beginning of the Reserve Bank of India's (RBI) policy rate cut cycle is expected to get delayed by a few months to the April-June 2012 quarter, mainly on account of inflation measured by the wholesale price index (WPI) remaining above nine per cent level for November. This is despite higher-than-expected moderation in economic growth in the current fiscal.

Even the expected cut in cash reserve ratio (CRR, or a portion of the bank deposits that have to be kept with the RBI as reserve) in the impending mid-quarter review on Friday is expected to get delayed till January 2012, because of lower-thanexpected fall in November inflation. At the most, RBI may pause the rate hikes on Friday, as it had hinted in October, when it announced its mid-term policy. It said if the inflation moderates as expected by December, it would halt its rate hike cycle.

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November WPI headline inflation eased to 9.11 per cent year-on-year, slightly above expectations of economists of about nine per cent. WPI above the nine per cent level is anathema for the RBI, which hiked policy rates 13 times in the past 20 months to bring it below that level. "Given Wednesday's inflation release, it is unlikely that the RBI will opt for a CRR cut when it meets this Friday and will instead focus on using tactical measures such as OMO buybacks (of government securities) to ease the recent drag on liquidity," said Abheek Barua, chief economist, HDFC Bank.


PERSISTING PAIN

  • Rate cut cycle is expected to begin by April-June 2012 quarter
  • WPI inflation continuing to remain above 9% level in November seen as reason
  • Even a cut in the CRR is likely to get delayed till January 2012
  • At the most, Reserve Bank may pause the rate hikes on Friday
  • Another argument against the CRR cut is that it could increase liquidity in banks & boost demand
  • Inflationary conditions have put the RBI in a dilemma, as manufacturing inflation is spiralling even as industrial growth is contracting


Another argument against CRR cut on Friday is that it will go against the grain of the RBI policy to check inflation spiral, as such a step could increase liquidity in banks and boost demand in the economy. "The RBI is, however, likely to build in a dovish rhetoric in its monetary stance leaving the door open for a possible CRR cut in January and a repo rate cut in April-June quarter," Barua added. However, there is a hope among some economists that the deteriorating economic conditions may force advancement of rate cut cycle.

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"We believe that the poor macro data as reflected in sub-seven per cent GDP (gross domestic product) growth, contraction in IIP (index of industrial production), lower PMI (Purchase Managers' Index) and weak sectoral trends, coupled with signs of abating inflationary pressures, deserves some monetary stimulus. We place the odds at 30 per cent for advancement of the easing cycle (from the April-June quarter)," said Rohini Malkani, economist, Citi India.

There is a general expectation among economists that inflation will moderate to seven per cent level by March 2012, mostly because of the high base effect in inflation in the wake of crop damages suffered due to unseasonal rains in December.

Siddharth Shankar, director of Delhi-based KASSA Group, said, "While November inflation could have fallen sharply, the decline in the rupee has resulted in rise in manufacturing inflation. Going forward inflation will fall surely but slowly in the coming quarter."

The current inflationary conditions also put RBI in a dilemma, particularly when non-food manufacturing inflation is spiralling even as industrial growth is contracting as was reflected in the November IIP data. "While contraction in industrial output advocates monetary easing, increase in inflation of non-food manufactured products prices suggest otherwise," said Devendra Kumar Pant, director of Fitch Ratings.