Hawkish RBI Keeps Everyone Guessing

Tempers rate cut hopes by voicing concerns over fiscal & current a/c deficit

The Reserve Bank of India (RBI) threw markets and industry into a tizzy by suggesting that the first cut in interest rates in nine months, widely viewed as a slam dunk event at Tuesdays monetary policy review,could no longer be taken for granted.On the eve of the keenly expected review, the central bank, whose officials have already tempered hopes of aggressive rate cuts in the past few weeks,struck a hawkish tone on the state of fiscal and current account deficits,appearing to throw into question even the much-expected 25-basis-point reduction in rates. Given the preponderance of non-monetary factors behind the current slowdown in an environment where risks from high inflation, current account and fiscal deficits still remain, the scope for supportive monetary policy action is constrained, said RBIs Macroeconomic and Monetary Developments Third Quarter Review.As reform actions get executed,monetary policy could increasingly focus on growth revival. Predictably, RBIs comments in the report, released after markets closed for trading on Monday, rattled investors and other market participants thinking afresh about what would happen on Tuesday.Investors have already factored in a 25-bps cut in repo rate the rate at which RBI lends to banks to 7.75%. A basis point is 0.01 percentage point. The RBIs macro report is hawkish and increases the likelihood of no repo rate cut tomorrow, said Sonal Varma at Nomura Securities.It suggests that the forward guidance will also likely be hawkish with RBI highlighting the downward rigidity in inflation and the twin deficits as limiting the scope for aggressive policy easing, she said.


Economic Times, New Delhi, 29-01-2013



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