RBI delivers after a pregnant pause

In addition, the RBI pleasantly surprised the market with a cut in the CRR by 25 bps to 4.0%.

Since the second quarter review of monetary policy in October 2012, there has been some softening in the growth-inflation balance. This is evident from RBI’s revised outlook on both growth (FY13 GDP estimate was lowered to 5.5% from 5.8% earlier) and inflation (WPI inflation estimate for Mar-13 was lowered to 6.8% from 7.5% earlier).

The sharp downward revision in inflation estimate despite the bold upward adjustment to domestic fuel prices over the last four months is noteworthy. This, in our view, is reflective of the impact of past monetary tightening, stable commodity prices and limited pricing power, amid a negative output gap, leading to significant reduction in demand side pressures.

With core inflation remaining below its long term (seven-year) average of 4.7% for two straight months, amid a soft growth momentum, and government persisting with measures to correct twin deficits, today’s move stands completely justified.

Going forward, the growth-inflation trajectory is expected to turn favorable, albeit gradually.

We expect GDP growth to improve to 6.5% in FY14 from 5.7% in FY13 with average WPI inflation expected to ease by around 70-80 bps to 6.7-6.8% in FY14. With continued

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