Quarterly policy review: RBI keeps interest rates, CRR unchanged, focus shifts to growth
"In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to threats to growth from this point onwards," RBI Governor D Subbarao said in the mid-quarter monetary policy review.
The Reserve Bank of India (RBI) left the short-term lending (repo) rate and the cash reserve ratio -- the amount of deposits banks have to park with RBI-- unchanged at 8 per cent and 4.25 per cent, respectively.
RBI said that it is closely monitoring the evolving growth-inflation dynamics and it is likely to ease monetary policy in the January-March quarter.
The third quarter review will be unveiled on January 29.
Bankers felt that RBI would keep the promise and cut key interest rates next month giving them a leeway to pass on the benefits to retail consumers and corporates.
"I don't think banks will change their lending or deposit rates at the moment," Oriental Bank of Commerce CMD S L Bansal said, adding banks would consider a rate cut once RBI softens monetary stance.
HDFC Vice-chairman and CEO Keki Mistry said: "We will see lower interest rates in 2013.
I expect RBI to cut rates by 0.50 per cent before March and more rate cuts from April."
As regards the corporate sector, industry chambers expressed disappointment but took satisfaction from RBI's guidance that the central bank would consider a rate cut in the January policy review.
Commenting on the policy, Chief Economic Adviser Raghuram Rajan said it is good that RBI sees room for rate cut.
"I think its good that RBI sees that 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)," Rajan said.
"But they (RBI) also have some incentive to seek growth in the country," he said. Ficci President Naina Lal Kidwai said: "… disappointing, industry is crying out for an impetus for investment and growth and lower interest rates would be oxygen to the sentiment which is beginning to turn positive.
" Asserting that RBI has its own constraint, Commerce and Industry Anand Sharma said: "There is, of course, a positive side that India has an independent regulator RBI which is not listening both to myself and finance minister but we expect them to.
" Sharma said: "We are hoping that after major decisions the government has made which has boosted investors morale and confidence, RBI will be less conservative.
" On inflation, the RBI policy review said that WPI inflation is showing some signs of moderation.
"liquidity conditions will be managed with a view to supporting growth... thereby preparing the ground for further shifting the policy stance to support growth," it said.
The RBI said that since the Second Quarter Review in October, the global economy has shown some signs of stabilisation although the situation remains fragile.
Lauding the government's recent policy initiatives, the RBI said, "further reforms should help to boost business sentiment and improve the investment climate".
In its mid-year economic analysis for 2012-13, the Finance Ministry while projecting the GDP growth for current fiscal at 5.7-5.9 per cent, had pitched for supportive monetary and fiscal policies to improve investor confidence.
The central bank has kept its policy rates on hold since April when it had last lowered the repo rate by 0.50 per cent.
As regards inflation, the RBI said, "The non-food component of the index also suggested persistent inflationary pressure".
The WPI inflation in November moderated to 7.24 per cent, but retail inflation remain elevated at 9.90 per cent.
Looking forward, it said, "The emerging patterns reinforce the likelihood of steady moderation in inflation going into 2013-14, though inflation may edge higher over the next two months."
It said the biggest risk to outlook stems from global politico-economic developments which could delay resolute policy action.
"While several emerging and developing economies are gradually returning to higher growth, weak external demand and contagion risks from advanced economies render them vulnerable to further shocks," RBI said.
On the domestic front, it said, there are some incipient signs of pick-up though growth remains significantly below its recent trend. The industrial output growth bounced back to 8.2 per cent in October, 2012, against a contraction of 5 per cent in the same month last year.
The Indian economy grew by 5.4 per cent in the first half (April-September) of the current fiscal, against 7.3 per cent in the corresponding period last year.
The RBI in its second quarter policy review had projected the GDP growth for the current fiscal at 5.8 per cent.
The mid-quarter review of the economy said, "both fiscal and monetary policy, however, would need to be supportive to sustain investor confidence. The government will also have to address the concerns relating to structural supply side bottlenecks".
Following are the highlights of RBI's Mid-Quarter Monetary Policy Review:
* RBI keeps interest rate (repo rate) and cash reserve ratio (CRR) unchanged.
* RBI says global economy has shown some signs of stabilisation although situation remains fragile.
* At home, there are some incipient signs of pick-up though growth remains significantly below its recent trend.
* Recent policy steps by the Govt and more reforms should help boost business sentiment, improve investment climate.
* Inflationary pressure moderating but high food and commodity prices continue to remain a risk.
* RBI says it is closely monitoring the evolving growth-inflation dynamics.
* RBI to update formal assessment of its growth and inflation projections for 2012-13 in January.
* With inflation pressures ebbing, monetary policy has to shift focus and respond to threats to growth from now on, says RBI.
RBI keeps rates unchanged, hints at rate cut in January
(Reuters) India's central bank kept interest rates on hold on Tuesday, ignoring government pressure to reduce borrowing costs, but said it was shifting its focus towards boosting a flagging economy, raising the odds of a rate cut as early as January.
The Reserve Bank of India (RBI) reiterated guidance from its last policy meeting in October that it was likely to resume monetary policy easing in the January-March quarter, as inflation pressures are expected to ease in the next few months.
Wary of stubbornly high inflation, the RBI has kept its key policy rates on hold since a 50 basis point cut in April, in contrast to other big emerging market central banks in China, Brazil and South Korea that have been more aggressive in easing policy to support growth.
On Tuesday, the central held the repo rate at 8.00 percent and also kept its cash reserve ratio (CRR) for banks steady at 4.25 percent, its lowest level since 1974. The CRR is the share of deposits that lenders must keep with the central bank.
"In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards," the central bank wrote in its mid-quarter monetary policy review.
A Reuters poll last week showed 37 of 41 economists had expected the RBI to hold the policy repo rate steady, while respondents were roughly evenly split over the likelihood of a cut in the CRR.
A lower-than-expected headline inflation reading in data released on Friday, after the polling was completed, had been seen in some quarters as raising the chances of a rate cut.
"Whatever the RBI spelt out in October seems to have got support from the inflation trajectory," said Abheek Barua, chief economist at HDFC Bank, in New Delhi. "Net of the base effect, we see the current trend continuing and a case for a rate cut strengthening, which they could do in January."
WEAK GDP PERFORMANCE
The central bank has repeatedly resisted pressure from the finance ministry to cut rates to prop up an economy that has posted GDP growth below 6 percent for the past three quarters and is on track for its weakest annual performance in a decade in the fiscal year ending March.
Whilst such a growth rate is still robust by the standards of developed economies, it is worryingly sluggish for a country that aspires to annual expansion of at least 8.5 percent to provide jobs for it burgeoning population.
"I think it is good that RBI sees there is room to ease and clearly they are taking a decision, keeping in mind their main job is combating inflation," said Raghuram Rajan, chief economic adviser to the finance ministry.
"But they also have some incentive to seek growth in the country."
The 10-year bond yield fell 3 basis points to 8.14 percent from levels before the decision, reflecting somewhat heightened expectations of a rate cut early in 2013.
The benchmark stock index was flat.
"Liquidity conditions will be managed with a view to supporting growth ... thereby preparing the ground for further shifting the policy stance to support growth," the RBI said.
The Congress-led minority government, faced with threats of sovereign rating downgrades due to a widening fiscal deficit, is trying to pass key reform bills allowing greater access to foreign investors in the retail, banking and insurance sectors.
Appreciating the government's recent policy initiatives, the central bank said such moves along with further reforms should boost business activity and investment climate.
Standard & Poor's last week issued another warning to India's credit rating, saying a wide fiscal deficit and a heavy debt burden were the most significant rating constraints.
The wholesale price index (WPI), India's main gauge for inflation, softened to a 10-month low of 7.24 percent in November. It has remained above 7 percent for the past three years.
"Signs in softening RBI guidance is apparent as focus has shifted to growth, and odds for a rate cut in the January-March quarter are likely to gather considerable momentum here on," said Radhika Rao, an economist at Forecast Pte in Singapore.
"Barring a sharp acceleration in December WPI, we look for a 50 basis points reduction in Q1 2013, possibly front-loaded in the January meeting."
LEIF ESKESEN, CHIEF ECONOMIST FOR INDIA AND ASEAN, HSBC, SINGAPORE
"The Reserve Bank of India did not see a need to cut the cash reserve ratio at this point, which is a little bit of a surprise. But otherwise their action is in line with expectations.
"They have re-emphasized their earlier guidance of possible easing in the last quarter of the fiscal year. I think there is still limited room to cut rates. Structural reforms and a revival of investment in infrastructure would be needed to revive growth."
ARVIND CHARI, FIXED INCOME FUND MANAGER, QUANTUM ASSET MANAGEMENT, MUMBAI
"The lack of a CRR cut means that OMOs (open market operations) will continue, which is extremely supportive of bond prices. The text suggests that the January policy should see a repo rate cut, so it makes sense to continue to remain long bonds. We were a bit disappointed by not seeing a rate cut today. Given that the overall trend is towards easing, there was no major reason to wait for the January policy."
SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI
"While we definitely expected liquidity injection through more calibrated moves based on government spending, open market operations would still be the preferred route. So basically we are anticipating a rate cut in January by 25 basis points and in March by 25 bps and going into the next fiscal year, we are expecting 50-75 bps additional rate cuts.
"If the government keeps a very tight lid on spending in the rest of the fiscal year, we could see a CRR move, but given the sticky nature of government expenditure, it would still be the OMO route for liquidity injection."
RADHIKA RAO, ECONOMIST, FORECAST PTE, SINGAPORE
"Last week's sub-consensus November WPI had fanned speculation in some quarters that the RBI might lower the key rate today, though we reckon that a cut at this stage would have been premature given the scope for these prints to be revised higher in coming months.
"That said signs in softening RBI guidance is apparent as focus has shifted to growth and odds for a rate cut in Jan-March quarter is likely to gather considerable momentum here on. Barring a sharp acceleration in December WPI, we look for a 50 basis points reduction in Q1 2013, possibly front-loaded in the January meeting."
ANUBHUTI SAHAY, ECONOMIST, STANDARD CHARTERED BANK, MUMBAI
"The RBI has struck a cautious note even as it acknowledged moderation in inflation. We expect RBI to reduce repo rate by 25 basis points in Q1 2013 as moderation in the inflation trajectory is likely to be confirmed by then."
A. PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD, MUMBAI
"I think it's slightly more dovish than the October policy, driven by lower than expected inflation. They are still concerned about growth. My expectation is of cut in CRR and the repo rate by 25 basis points in January and another repo rate cut of 25 bps in March.
"They have said they will continue to provide liquidity and that implies OMO will continue. We expect another 500 billion rupees ($9.12 billion) through OMOs until March.
"We are not sure about additional borrowing, because even if there is some slippage to the 5.3 percent fiscal deficit target, it can be managed through additional T-bills."
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI
"In line with our expectations, the RBI did not ease monetary policy today citing elevated level of retail inflation. But the language has certainly become more dovish and the probability of a rate cut in January has gone up."
SHAKTI SATAPATHY, ANALYST, AK CAPITAL, MUMBAI
"Today's announcement was mostly in line with the previous tone of the policy. Given growth supportive fiscal stance taken in the recent days by the central government along with ebbing inflationary pressure from the coming months, the RBI would seek a proactive 50 bps repo cut in the January policy.
"With almost all the negativity priced in and continuation of timely OMOs, the government bond yields would be on a downward bias in the coming weeks."
ARUN SINGH, SENIOR ECONOMIST, DUN & BRADSTREET, MUMBAI
"Today's action shows the Reserve Bank of India's seriousness in fighting inflation. The ideal time for the central bank to cut rates will be the end of January, provided there are no surprises on the inflation front. "I think there will be a 25 to 50 basis points cut in the repo rate in the March quarter."
UPASNA BHARDWAJ, ECONOMIST, ING VYSYA BANK, MUMBAI
"RBI's forward guidance seems fairly pro-growth, further reinforcing our view that the central bank will ease repo rate in the January meeting. We expect a total 50 bps rate cuts in the March quarter."
ANJALI VERMA, ECONOMIST, MF GLOBAL, MUMBAI
"The tone of the policy warranted a CRR cut. The liquidity deficit is about 3 percent of bank deposits. OMOs will most likely continue to come, but does not ease the liquidity situation much.
"I think the policy today reinforces a 25 bps repo cut in January. I expect 50-100 bps of cumulative rate cuts in 2013."
SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI
"The policy is benign. I think the RBI will begin the easing cycle with a CRR cut in the January policy. The first rate cut will come in February-March and I expect cumulative 75 basis points of repo cuts by June."
ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK, NEW DELHI
"I had expected a CRR cut but there was no compelling reason to do so. Whatever the RBI spelt out in October seems to have got support from the inflation trajectory. Net of the base effect, we see the current trend continuing and a case for rate cut strengthening, which they could do in January.
"There is still some uncertainty on government's borrowing, and they could borrow additionally in the last quarter, which could create a situation of tight liquidity and RBI could save for a CRR cut until then.
"I think today's move reinforces the expectation of more open market operations, which is a bond positive."
ANEESH SRIVASTAVA, CHIEF INVESTMENT OFFICER, IDBI FEDERAL LIFE INSURANCE CO LTD, MUMBAI
"It's another disappointing policy against hopes of a CRR cut and a long shot of a rate cut, but RBI may act in January though.
"One good thing is markets are seeing buying at lower levels."
* The benchmark 10-year bond yield fell 3 bps to 8.14 percent after rising 1 basis point to 8.17 percent immediately after the policy.
* The rupee trimmed gains to trade at 54.79/80 from 54.76/77 after the policy decision.
* The benchmark 5-year OIS rate rose 4 bps to 7.15 percent while the 1-year OIS rate firmed 6 bps to 7.67 percent.
* The main stock index dropped 0.4 percent in a knee-jerk reaction after the policy. It had pared most gains and was flat just before the announcement.
- Wholesale inflation cooled to its weakest pace in 10 months in November, a sign the economy may finally be escaping a long period of price pressure and raising the chances of a rate cut in January.
- The wholesale price index-based inflation is expected to trend downwards in the next two to three months, Finance Minister P. Chidambaram said on Friday.
- A surge in manufacturing output pushed industrial growth to its highest in more than a year in October, a sign that Asia's third largest economy may have turned a corner, but economists said more data was needed to see if the pace can be sustained.
- India will speed up the sale of stakes in state companies to revive the stock market and will push ahead with reforms aimed at spurring an investment recovery in the flagging economy, Prime Minister Manmohan Singh said on Saturday.
- The government raised $1.1 billion selling a stake in miner NMDC Ltd last week in a fillip for its efforts to rein in a widening fiscal deficit through sales of state assets.
- India's wide fiscal deficit and a heavy debt burden are the most "significant rating constraints" to the country's sovereign rating, Standard & Poor's said on Dec. 11, reiterating its warning that India faces a one-in-three chance of being downgraded to junk over the next 24 months.
- The cabinet last week approved the creation of a special panel on Thursday with watered-down powers to speed up the notoriously slow implementation of big-ticket infrastructure projects.
READ FULL RBI REPORT: Mid-Quarter Monetary Policy Review - December 2012
Monetary and Liquidity Measures
On the basis of the current macroeconomic assessment, it has been decided to: keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.25 per cent of their net demand and time liabilities; and keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent.
Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) and the Bank Rate at 9.0 per cent.
2. Since the Second Quarter Review (SQR) of October 2012, the global economy has shown some signs of stabilisation although the situation remains fragile. While activity is picking up in the US and the UK, near-term prospects in the euro area are still weak. Moreover, there is no clarity as yet on how the US ‘fiscal cliff’ might be managed. While several emerging and developing economies (EDEs) are gradually returning to higher growth, weak external demand and contagion risks from advanced economies (AEs) render them vulnerable to further shocks.
3. On the domestic front, there are some incipient signs of pick-up though growth remains significantly below its recent trend. Also, though consumer price inflation remains stubborn, the pace of moderation in wholesale price inflation has been faster than anticipated. With food and manufacturing prices expected to edge down further, inflationary pressures may ease somewhat in the coming months.
4. Since the SQR, global activity has remained sluggish, but country growth trajectories appear to be de-coupling. In the US, the revised GDP estimates for Q3 of 2012 indicate that a pick-up in growth is underway, supported by rising non-farm payroll employment, home sales and house prices. In order to support a stronger recovery, the Fed continued its quantitative easing, and announced further expansion through purchase of longer-term treasury securities. In contrast, euro area growth contracted for a second successive quarter in Q3, and retail sales have been declining at a faster pace in Q4. In Japan, GDP growth contracted in Q3, triggering a fresh dose of fiscal stimulus. Overall, the global purchasing managers’ index (PMI) for November points to acceleration, with the all-industry index recording an eight-month high. International energy and non-energy commodity prices softened in November for the second month in a row, suggesting lower inflationary pressures.
5. GDP growth in Q2 of 2012-13 at 5.3 per cent was marginally lower than 5.5 per cent in Q1. However, there are some indications of a modest firming up of activity in Q3. Industrial activity rose sharply in October but this is, in large part, due to a low base and festival-related demand which propelled the growth of both consumer durables and non-durables into double digits. Significantly, capital goods production recorded a growth of 7.5 per cent after 13 successive months of decline. The manufacturing PMI rose moderately in November as order book volumes expanded. While the services PMI declined from a month ago, expansion in new business and order book volumes suggests positive sentiment about increasing activity in the months ahead. In the farm sector, rabi sowing coverage is expanding steadily, improving the prospects of agricultural growth.
6. Headline WPI inflation edged down to 7.2 per cent in November, mainly owing to softening of prices of vegetables, minerals and fuel. On the other hand, prices of cereals and protein-based items such as eggs, fish and meat firmed up further. Significantly, core (non-food manufactured products) inflation eased, aided by decline in prices of metals, cement and chemicals. The seasonally adjusted three-month moving average annualised momentum indicator also points to ebbing of inflationary pressures. However, in striking contrast to wholesale inflation developments, retail inflation remained elevated. The new combined (rural and urban) CPI (Base:2010=100) inflation increased in November, reflecting sustained food inflation pressures, particularly in respect of vegetables, cereals, pulses, oils and fats. The non-food component of the index also suggested persistent inflationary pressures.
Monetary and Liquidity Conditions
7. While money supply (M3) growth remained below its indicative trajectory because of lower deposit growth, non-food credit growth rose above the indicative trajectory of 16 per cent suggesting some pick-up in economic activity. Liquidity conditions have remained tight in Q3 due to large government balances with the Reserve Bank and the widening wedge between deposit and credit growth. With a view to containing the liquidity deficit at reasonable levels, the Reserve Bank conducted open market operations (OMOs) on December 4 and 11, injecting primary liquidity of `232 billion. Accordingly, money market rates remained close to the repo rate.
8. With the step-up in oil imports persisting despite the moderation in crude prices, the cumulative trade deficit for April-November widened from its level a year ago indicating significant risks to the balance of payments from the adverse external environment. Even as capital inflows improved compared to Q2, there were downward pressures on the rupee reflecting the large trade and current account deficits.
9. Lead indicators point to a modest firming up in the momentum of global growth over the rest of 2012 and in 2013 if there is firm policy action in the euro area and the US. The biggest risk to the outlook stems from political economy considerations that could impede, delay or erode resolute policy action. The consequences could be deepened financial stress and heightened risk aversion. For EDEs, the threat of spillovers remains significant in view of the depressed outlook for global trade and volatile capital flows. Although inflation pressures appear to be moderating, elevated food and commodity prices remain contingent risks, especially for EDEs facing domestic supply constraints.
10. On the domestic front, GDP growth is evolving along the baseline projection of 5.8 per cent for 2012-13 set out in the SQR. The recent policy initiatives by the Government and further reforms should help to boost business sentiment and improve the investment climate. As regards inflation, excess capacity in some sectors is working towards moderating core inflation. Furthermore, the easing of international commodity prices, particularly of crude, is expected to impart some softening bias to the evolving inflation conditions if it is not offset by the impact of rupee depreciation. The Reserve Bank is closely monitoring the evolving growth-inflation dynamic and will update the formal numerical assessment of its growth and inflation projections for 2012-13 as part of the third quarter review in January 2013.
11. Headline inflation has been below the Reserve Bank’s projected levels over the past two months. 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. In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards. Liquidity conditions will be managed with a view to supporting growth as stated in the SQR, thereby preparing the ground for further shifting the policy stance to support growth. Overall, recent inflation patterns and projections provide a basis for reinforcing our October guidance about policy easing in the fourth quarter. However, risks to inflation remain and accordingly, even as the policy emphasis shifts towards growth, the policy stance will remain sensitive to these risks.
Chief General Manager, RBI
* Keeps repo rate unchanged at 8 percent.
* Reverse repo stays at 7 percent.
* Cash reserve ratio stays at 4.25 percent.
* Monetary policy has to increasingly shift focus and respond to threats to growth from this point onwards.
* Recent inflation pattern reinforces October guidance for policy easing in Jan-March.
* Liquidity conditions will be managed to support growth.
* Even as policy emphasis shifts towards growth, it will remain sensitive to inflation risks.
* Emerging patterns reinforce the likelihood of steady moderation in inflation going into 2013/14.
* Inflation may edge higher over next two months.
* Though consumer price inflation remains stubborn, the pace of moderation in wholesale price inflation has been faster than anticipated.
* Excess capacity in some sectors is working towards moderating core inflation.
* Headline inflation has been below RBI projections for past two months.
* Decline in core inflation has been comforting.
* Elevated food and commodity prices remain contingent risks, especially for emerging and developing economies facing domestic supply constraints.
* GDP growth is evolving along the baseline projection of 5.8 percent for 2012/13.
* There are some incipient signs of pick-up though growth remains significantly below its recent trend.
* Recent government policy initiatives, further reforms should help improve investment climate.
* Biggest risk to the global outlook stems from political economy considerations that could impede, delay or erode resolute policy action.
* Some indications of a modest firming up of activity in Q3 (October-December).
* Rabi (winter) sowing coverage is expanding steadily, improving the prospects of agricultural growth.
Timeline: Changes to CRR since 1992
Following is a timeline of changes to the CRR since 1992.
RATE (percent) EFFECTIVE DATE (day-month-year)
Timeline: Changes to repo rate since June 2000
Following is a timeline of changes to the repo rate since June 2000.
* RATE (percent) EFFECTIVE DATE (day-month-year)
Timeline: Changes to reverse repo rate since 2001
Following is a timeline of changes to the reverse repo rate since February 2001.
* RATE (percent) EFFECTIVE DATE (day-month-year)
Timeline: Changes to SLR for banks since 1949
Following is a timeline on changes in the statutory liquidity ratio (SLR) since 1949.
RATE (PCT) EFFECTIVE DATE
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