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Dalal St doesn’t expect a rate cut this week

Monday, 17 December 2012 - 9:00am IST | Place: Mumbai | Agency: DNA
Sees RBI cutting CRR and going for more bond buys to ease liquidity.

Ask a banker and he will always be hoping for a policy rate cut.

But even the ardent optimists do not see the central bank obliging  when it unveils the mid-quarter review of its monetary policy on Tuesday.

A poll of 15 economists and treasury officials of banks conducted by DNA shows that Reserve Bank of India (RBI) may not loosen the noose around inflation as yet. This, despite the wholesale inflation easing for two months in a row.

“Overall, the trend is confirming that the pricing power is coming down with the demand side of the economy slowing,” said Samiran Chakraborty, regional head of research, South Asia at Standard Chartered Bank.

While RBI expects inflation to be at 7.5% by March 2013, it has already eased to 7.2% in November. The central bank had increased the year-end inflation projection twice this fiscal and said it may rise “somewhat” in the third quarter, before beginning to ease in the last.

“We do see RBI keen to begin playing its part in supporting the economy, especially with a range of fiscal and investment friendly reforms being undertaken by the Centre,” said Taimur Baig and Kaushik Das, economists at Deutsche Bank.

However, factors like sticky retail inflation or the consumer price index and the desire to see longer downward trend in wholesale inflation may keep the RBI away from cutting the policy rate.

The central bank has not taken any action on the policy rate since a 50 basis point cut in April 2012.

Keeping in mind the tight liquidity conditions, almost 50% of the respondents polled expect RBI to cut cash reserve ratio (CRR) from the present level of 4.25%. The rest expect the central bank to continue infusing liquidity through open market operations (OMOs). Also, the reduction in CRR may only be effective from the new reporting fortnight beginning December 29.

“By that time, some of the liquidity crunch arising out of advance tax outgo will fade out. The whole purpose of cutting CRR will be lost,” said Saugata Bhattacharya, chief economist, Axis Bank.

Going by RBI’s tendency to surprise the market each time, there is some hope for early celebrations. Brinda Jagirdar, economist at State Bank of India, expects RBI to reduce policy rate as well as cash reserve ratio in order to boost growth.

Siddhartha Sanyal and Rahul Bajoria, economists at Barclays, said the central bank had cut repo rate 50 bps in April 2012 when core inflation was not as soft. Core inflation measured as non-food manufacturing inflation fell to 4.5% in November.


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