Monetary Policy: Yet another reluctant rate cut - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Monetary Policy: Yet another reluctant rate cut

Mar 19, 2013

The Reserve Bank of India (RBI) made yet another cut in the repo rate, in its mid-quarterly Monetary Policy review. The Cash Reserve Ratio (share of deposits banks have to park with the RBI) was however kept unchanged. As we predicted at the start of the year, the central bank has become increasingly dovish come 2013. Although happy with the government’s focus on curtailing deficits, the RBI is clearly not comfortable with inflation levels. Nevertheless, under pressure to stimulate capital investment and growth, the central bank made a reluctant rate cut.

The repo rate has been cut by 0.25%. The rates for the CRR and the repo now stand at 4% and 7.5% respectively. Consequently the reverse repo rate under the Liquidity Adjustment Facility (LAF) stands adjusted to 6.5%.

How the situation has changed on the ground?

The US has been seeing some improvements in macroecnomic numbers. However, there is still uncertainty with regards to the debt ceiling and certain other temporary appropriations. The euro zone also continues to be plagued by various economic uncertainties most recent being the Cyprus bailout and taxation of bank deposits. Japan is still struggling, and while emerging markets are growing, their pace has slackened.

The Indian economy expanded at a 15-quarter low rate of 4.5% YoY in Oct-Dec 2012 quarter, which is worrying. The services sector, which was usually the bastion of growth, has decelerated to its slowest pace in a decade. Although industrial production in January picked up to 2.4% growth after two months of contraction, the recovery is still weak and a stimulant was required.

On the inflation front, the year-on-year headline Wholesale Price Inflation (WPI) edged up to 6.8% in February 2013 from 6.6% in January. Unfortunately, consumer inflation (CPI) continued its upward trend, touching a high of 10.9% in February 2013 on sustained pressures on prices of food items, especially cereals and proteins.

Going forward..

Export growth is still weak affecting the current account deficit and the fiscal deficit continues to loom large. Investment is key to invigorating growth in the country, and the RBI has tried to improve investment sentiment by cutting interest rates. But, just lowering rates is not the only way to revive sentiment. India needs to continue on a path of fiscal consolidation and bridge supply constraints in order to curb inflation.

More importantly, RBI Governor Dr Subbarao, acknowledged that there is limited headroom to ease monetary policy going forward as supply-demand balances persist. The government has to play a key role in stimulating growth with policy measures. But, with the deficit number hitting a record high, this is going to be a tough rope to walk.

We do not expect the rate cut to have any immediate positive impact on the banking sector in the near term. Pick up in capital investments too will be subject to many other factors besides lending rates.

Equitymaster requests your view! Post a comment on "Monetary Policy: Yet another reluctant rate cut". Click here!

  

More Views on News

How the YES Bank Collapse Unfolded - 10 Points (Sector Info)

Mar 9, 2020

A timeline of how YES Bank went from a stock market darling to a pariah.

Today's Stock Market Crash: 10 Points (Sector Info)

Mar 6, 2020

Top factors that dragged the markets lower today.

More Views on News

Most Popular

It's the Beginning of a New Bull Phase in Smallcaps (Profit Hunter)

Feb 24, 2021

Last time the smallcap index crossed 19k a big correction followed. Here's what makes it different this time.

Intraday Trading for a Living (Fast Profits Daily)

Feb 15, 2021

In this video, I'll cover your queries on intraday trading and also share my view on how to decide stop losses and target prices.

Top 5 Stocks Mutual Funds Bought and Sold in January 2021 (Sector Info)

Feb 16, 2021

A look at what India's top equity mutual funds bought and sold in January 2021.

I Would Recommend this Small-cap Stock Over Tesla (Profit Hunter)

Feb 16, 2021

Do you enjoy reading Tesla and Bitcoin stories? Here's a not so famous small-cap stock to profit from the rise of EVs.

More

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE BANKEX


Feb 26, 2021 (Close)

MARKET STATS