Inflation may surge on RBI cut: Analysts

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SummaryHowever, most market analysts have termed RBI rate cut as an "unexpected" positive move.

The Reserve Bank's (RBI) decision to cut repo rate by 50 basis points in its annual monetary policy for 2012-13 has been termed by market analysts as an "unexpected" positive move.

They, however, said this could fuel inflationary pressures further.

"The RBI in an unexpected move cut the repo rate by a 50 bps points citing concerns of growth slowing down below its post-crisis trend rate," Dun & Bradstreet (D&B) India Senior Economist Arun Singh said.

"Cutting the policy rate at a time when inflationary expectations are quite high given the incomplete pass-through of the global oil prices along with factors like the rupee depreciation and the uptrend witnessed in the food prices, could fuel inflationary pressures further," Singh said.

After a gap of three years, RBI today slashed short-term lending rate by 0.50 per cent to 8 per cent, a move that will reduce the cost of home, auto and corporate loans.

As the upside risk to the headline inflation loom large, it leaves little scope for the central bank to further ease the policy rates at least in the near term, Singh said.

Tarun Kataria, CEO India, Religare Capital Markets Ltd said: "The RBI announcement was a pleasant surprise and reflects the concern about a rapid deceleration in GDP growth.

If this can be supported by fiscal consolidation, a move to ease infrastructure bottlenecks and other progressive reforms, the India growth story can be revived quickly".

Some experts were of the view that the RBI has changed its stance from inflation control to growth.

"RBI has switched its stance from inflation control to growth and hence we have seen the first step through the rate cut. This rate cut is supported by liquidity," said Aneesh Srivastava, CIO at IDBI Federal Life Insurance.

He added that raising marginal standing facility (MSF) to 2 per cent of the banks total deposits will give some comfort to banks.

"Growth rate is below trend right now. Biggest factors affecting inflation such as commodity prices seem to be coming down. Thus, we feel, the trajectory of inflation will remain soft for 4-5 months, which can give some headroom for a rate cut in the June policy review," Srivastava said.

Killol Pandya, head of the fixed income (department) at Daiwa MF said if one sees beyond the rate cut, then the policy is more "hawkish than bullish".

"All in all the rate cut has been pretty much front- loaded as the market was expecting a 25 bps

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