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April 2012

CIO's view on RBI Monetary Policy
April 17, 2012

The window of opportunity provided by the recent moderation in core inflation to below 5% and the moderation in growth below the post crisis trend levels have resulted in a larger than expected policy rate reduction. The RBI has reiterated that the trend growth rate has reduced from below the pre crisis levels and is expected to increase moderately in the coming year. In line with the current trend growth rate, the RBI has cautioned that in the absence of fiscal and supply side measures the room for incremental rate cuts is limited. The baseline projections for the GDP growth rate  and year end inflation numbers are at 7.30% and 6.5% respectively. The key risk factors that could impact these estimates are the international crude prices, attainment of fiscal deficit estimates, inflation in protein items and also the current account deficit financing.

The RBI appears to have front loaded a portion of the rate reduction and is likely to be more circumspect in the near term on policy rates while ensuring that liquidity deficit remains within the comfort zone. Bond yields have fallen from the recent highs on anticipation of reversal in rates and with the policy guidance it is likely that the movement in rates would be increasingly governed by the supply scenario.