Market unimpressed by RBI's language

Reserve Bank of India governor Duvvuri Subbarao said he wanted to give some comfort to market participants, particularly investors, so that they could manage their expectations.

The market, however, was not very impressed by the language.
ICICI Securities economists A Prasanna and Anurag Jha said the RBI has possibly jumped the gun in taking this call.

“Apart from the fact that growth in the near-term (say 1-2 quarters ahead) will likely be unaffected by Tuesday’s monetary policy, the emphasis on the short run may prove to be harmful to the long running objective of containing inflation expectations,” they said in a post-policy note.

The apex bank stated that it expects major downward pressure on growth due to a deteriorating global environment.

“We believe that it is the prospect of weaker-than-expected domestic demand, especially investment growth that is sensitive to interest rate movements — that titled the scale in favour of a more dovish policy stance,” HDFC Bank economists Abheek Barua, Shivom Chakravarti and Jyotinder Kaur wrote in another note.

Also, Indranil Sen Gupta, economist, Merrill Lynch, said he expects the RBI to announce open market operations of around Rs100,000 crore in December-January, once inflation peaks off.

The RBI said that it expects inflation according to the wholesale price index to start easing from December and to reach the 7% mark by March. But the street, however, is not expecting it to moderate unless there is a demand shock.