RBI to Show its Interest in Rate Cuts Only in Jan

RILED FM SKIPS CUSTOMARY STATEMENT

    The Reserve Bank of India (RBI) maintained status quo on interest rates despite calls from the finance ministry for measures to support growth, but the prospects of cuts beginning January have increased because of easing price pressures and signs that the fiscal situation is on the mend. RBI Governor Duvvuri Subbarao's rigid anti-inflationary stance for more than a year appeared to be easing, even though he disappointed investors by not even reducing the cash reserve ratio (CRR) to ease liquidity pressures. 
Finance Minister P Chidambaram made no comment on the policy, possibly for the first time in years. In the past, he has publicly spoken of the need for lower interest rates. 
But Chief Economic Adviser Raghuram Rajan said it is good that RBI sees room for rate cut. "I think it's good that RBI sees there is room to ease. And clearly, they are taking a decision keeping in mind that their main job is combating inflation. I look forward to good news in policy (January)," he said, adding, "But they (RBI) also have some incentive to seek growth in the country." 
Subbarao left the key repo rate — the rate at which RBI lends to banks —at 8%, and CRR — the proportion of deposits banks need to keep with the central bank — at 4.25% as inflation remains elevated despite signs of moderation. "There is little doubt that RBI is readying to cut the policy rate in the first quarter of 2013, the only question is the timing — whether to cut in January or in March," said Ravneet Gill, chief executive at Deutsche Bank India. "On the evidence of today's guidance, the likelihood of a January rate cut has increased." 
Thirteen of the 15 economists and traders polled by ET forecast status quo on repo rate. But seven of them forecast a cut in cash reserve ratio. In fact, Goldman Sachs economist Tushar Poddar, in a daring forecast a day before the policy, bet on a 25-basis-point cut in repo rate, citing easing inflationary pressures. Tone Shifts to Supporting Growth 
This comes even as the price rise of manufactured products is slowing. But Subbarao reiterated his promise of a possible reduction in January. "Headline inflation has been below the Reserve Bank's projected levels over the past two months," he said in his midquarter monetary policy statement. 
"The decline in core inflation has also been comforting. These emerging patterns reinforce the likelihood of steady moderation in inflation going into 2013-14, though inflation may edge higher over the next two months." 
The benchmark Sensex, after a kneejerk fall, rose 0.63% to 19,364.75. The rupee, after breaching 55 to the dollar in volatile trade, ended unchanged at 54.85. The 10-year bond yield was flat at 8.1491% after a brief climb. 
This is the fifth straight policy rate pause by RBI after it lowered repo rate by 0.5 percentage points in April 2012, anticipating reform measures that would have contained fiscal deficit. Although fiscal deficit may eventually breach the upwardly revised target set at 5.3% of GDP, the situation has improved with the government managing to raise funds from sale of shares in state-run companies such as miner NMDC. 
"RBI danced to its own tune and kept the policy rate on hold in light of the persistence of inflation and lingering upside risks to inflation," said Leif Eskesen, economist for India and the Asean region at HSBC. "However, it is gearing up for potential policy rate cuts early next year, assuming inflation risks recede and policy progress on other fronts is sufficient." 
Wholesale price rise eased to 7.24% in November from 7.45% in October, but is still above RBI's comfort level of 4-5% in the medium term. But consumer prices gained 9.9% in November from 9.75% in October. Indeed, the core inflation of manufactured products, which the central bank watches keenly, has fallen to 4.5% in November after remaining above 5% for months. Even the economy seems to be on the mend, with higher-than-forecast factory output and business sentiment improving. The Index of Industrial Production gained 8.2% in October, compared with 0.7% in September, even though it could have been due to the buildup of inventory for the festival season. 
"Expansion in new business and order book volumes suggests positive sentiment about increasing activity in the months ahead," said Subbarao. 
RBI's tone shifted significantly to supporting growth even though it did not even reduce CRR. The tightness in the money market, which has led to borrowings of more than . 1 lakh crore from RBI, was due to high government balances. 
To address any tightening, the central bank will conduct open market operations where it would buy bonds, releasing funds into the market. Traders expect another . 50,000 crore of bond buyback before April. "RBI is expected to limit its action on CRR cuts, given that the 175-basis-point reduction in 2012 has led to the money multiplier rising to near-17-year high, which could worsen the inflationary pressure the moment domestic demand revives," said Upasana Bharadwaj, economist at ING Vysya Bank.