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Today's Market: What Subbarao's silence says? - Indian Stock Market News
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What Subbarao's silence says? 
(Tue, 18 Sep Pre-Open) 
 
The Reserve Bank of India (RBI) kept its key policy rate (repo rate) unchanged in the mid quarter monetary policy review. Though Cash Reserve Ratio (CRR) was reduced by 25 bps (0.25%) and the general consensus is that rate cycle has reached its peak, RBI seems to be in a no hurry to cut rates. That's because of worries pertaining to inflation.

The inflation figure for the month of August stood at 7.55%, up from 6.87% in July. This should ring in alarm bells as the 7.55% figure was reported on a high base of 9.78% that was prevalent in August last year. Secondly, core inflation (inflation excluding crude and food prices) was also up by 0.8% in the month of August. This is the most worrying factor as even after eliminating the effect of most volatile products (crude and food) inflation did not show any signs of receding. This depicts that manufacturing inflation is still not under firm control.

Further, the recent fuel price hike is expected to make the matters even worse. A hike in diesel prices is likely to stoke fuel inflation. As transportation costs increase, prices of essential vegetables/fruits are bound to rise. And this will stoke food inflation. Further, spectrum refarming and re-allocation of coal blocks may result in increasing tariffs of telecom services and power. Also, capping LPG cylinders per household will hurt common the common man.

Thus, it seems that the real impact of inflation is yet to re-surface. And Subbarao's silence in keeping the policy rates intact is a testament to that fact. Though the current set of reforms (easing norms for FDI in retail and aviation) were welcomed by the market with a big cheer, however the inflation monster is still ruling high. So, while one may be right in thinking that the rate cycle has peaked assuming that RBI may turn dovish soon can turn out to be an illusion.

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