March will see fresh round of cuts

It has begun. The 50 basis points (bps) cut in the cash reserve ratio (CRR) by the Reserve Bank of India (RBI) in its monetary policy review on Tuesday is the first of many actions that will happen in 2012.

Expect the central bank to cut CRR and the repo rate by 50 bps each in its mid-term policy review on March 15. This expectation will keep equities, bonds and currency markets in bullish mode.

Banks were borrowing over Rs150,000 crore every day from the RBI till last week, despite it buying over Rs70,000 crore of bonds and the government running around Rs15,000 crore of overdraft.

So the CRR cut, which induces Rs32,000 crore, won’t be enough.

To boot, the fiscal last quarter is short on liquidity and usually sees high demand for funds. The deficit in March could be well over Rs100,000 crore, needing another CRR cut.

Mint Road has said its move indicates change in policy stance from tightening to easing. It didn’t hint when the cuts will begin. Inflation’s trajectory will be clearer in March and is more likely to be below the RBI forecast of 7%.

The government will be presenting its Budget for 2012-13 on March 16 and will make the usual noises about addressing fiscal issues.

On Tuesday, the RBI cited government’s spending on subsidies as the reason why it’s not reducing repo rates, and if it can show better fiscal management plan in the next budget, the RBI will cut rates confidently.

Meantime, the revision of GDP growth for 2011-12 from 7.6% to 7% is an indication of private demand coming off in the economy.

The fall in credit growth to below 16% from around 22% at the start of this fiscal signifies lack of risk appetite among lenders.    

And the fall in corporate investment intentions by 77% in the second quarter underscores the lack of investment demand.

So tight liquidity conditions and high rates will lead to a slow fourth-quarter GDP growth -- reason why repo rate cuts will begin in March.

The markets have been bullish going into the policy with equities rallying by over 8% in the month to date and the rupee by over 5%.

Bond yields have come off by 20 bps since the beginning of January, but given the sharp rally, volatility will increase.

The writer is editor, www.investorsareidiots.com, a website for investors.