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Economy Mar 16, 2012

RBI did its bit last week, policy on expected lines: bankers

Mumbai: Leading bankers termed the Reserve Bank's decision to keep all key policy rates unchanged as "on expected lines".

They also pointed out that the 75 basis points reduction in the cash reserve ratio last Friday was the main reason for not expecting anything major from today's mid-quarter review. "The review was on expected lines and I am not disappointed by the Governor leaving all the policy tools unchanged. The RBI has done its bit last week with a 75 bps CRR cut," State Bank chairman Pratip Chaudhuri told PTI.

On Thursday, Reserve Bank left all the key policy tools unchanged at the mid-quarter review, citing rising inflationary pressures, widening fiscal slippages and the rising oil prices as the main reason for the cautious stance. Indian Banks Association Chairman and Bank of Baroda Head M D Mallya also said he was not surprised by the move, and probably the governor looked at the overall situation and especially the forthcoming Budget to take a cue.

"The move is consistent with anti-inflationary stance of the RBI in the past two years and more," Mallya said. M V Tanksale of Central Bank of India went a step further and defended the policy stance saying it was fully on expected lines "as the basic concern of liquidity was addressed last week. There was no room for a repo rate cut too as inflation menace has started looking worrying again".

"As a banker I don't see any rate cut even in the April policy if three main concerns of inflation, fiscal deficit and rising oil prices are addressed. There is no point in predicting that there will be cut or not," Thanksale told PTI.

Citi India said the policy stance appears to be more hawkish, with the focus more firmly back on inflation. Reuters

Federal Bank MD and CEO Shyam Srinivasan termed the mid-quarter policy review as expected, and said after a 75 bps CRR cut, Thursday's review was expected to be a non-event, except a slimmer hope of 25 bps cut in the repo rate. He further said the move is based on the fact that non-food manufacturing inflation, which represents core inflation, has only moderated to less than 6 percent against RBI's comfort level of 3 percent.

HDFC Bank Chief Economist Abheek Barua said RBI action was on predictable lines as after having already cut its CRR by an aggressive 75 bps last Friday, not too much was expected of the review. "If the government does target a lower fiscal deficit next fiscal, a repo rate cut in April still likely," he said, adding that however "the upside risks to inflation still remain and firm global commodity prices are likely to curtail the degree of monetary easing going ahead."

Andhra Bank Chairman and Managing Director B A Prabhakar too said the policy review was on expected lines as RBI is waiting for the Budget to see larger fiscal picture. He further noted that the RBI has flagged the same set of concerns in the past, and "inflation movement will continue to guide the policy stance at the April policy".

M Narendra of Indian Overseas Bank said as the policy was scheduled just before the Budget, the rates are kept unchanged because the RBI wants to take direction from the fiscal deficit target set in the upcoming Budget. He also said the steps for fiscal deficit reduction along with increase of investment in the Budget would be key to future decisions of the central bank.

Narendra, however, said inflation numbers, which are facing the risk of an upward bias due to rise in oil prices, would be critical factor to watch in the near future. YES Bank, however, said the policy stance was contrary to its expectation of a 25 bps cut in the repo rate. However, it added that the rising inflation risk continues to override growth concerns in RBI's opinion. YES Bank expects growth risks to become dominant amid lurking inflationary concerns, which are unlikely to recede significantly in the coming year, and sees a 75-100 bps cut in the repo rate cut by December.

HSBC Chief Economist (India) Leif Eskesen said the RBI has left the ball into the Finance Minister's court today, as expected. He also said the RBI still sees upside risks to inflation from oil prices, the weakened rupee, and fiscal
slippages.

Citi India said the policy stance appears to be more hawkish, with the focus more firmly back on inflation. "Unlike the previous policy where the RBI had said the rate decision would be contingent on fiscal consolidation and steps to incentivise investment, this time it has broadened emphasis to other variables fuelling inflation, as discussed above." StanChart India research head Samiran Chakraborty termed the policy stance as more cautious than the previous time, as RBI has not raised any red flags on growth but it sounded more cautious on inflation.

However, he noted that downside risks to his forecast of a 150 bps cuts in repo in FY'13 has increased. He further notes that the tone of the RBI statement was less dovish than expected, as even though the central bank acknowledged the
growth slowdown, it did not raise any red flags on the slower pace of economic activity. Going forward, he said he expects RBI to start the monetary policy easing cycle at its April meeting and expects a 25 bps reduction in the repo rate in April, if inflation falls further and if the budget gives more clarity on fiscal deficit target.

Crisil's chief economist D K Joshi said by keeping the policy rates unchanged, RBI has given a signal that any easing will take cue from the Budget, especially from fiscal deficit target announced for the next fiscal. Also, inflation will be another key factor for the rate cuts in the near future. "We have to keep in mind that inflation remains high for nearly six years now and any easing will have to take these things into consideration," Joshi said, adding he sees some easing in the April policy.

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