The RBI Governor, Subbarao has repeated often
enough that he is uncomfortable with consumer prices rising 10% and
whole sale price inflation at over 7%. The market is now convinced RBI
is out to keep interest rates high and money expensive till prices fall.
Hence, 90% of the respondents in the CNBC-TV18 poll said that they
don’t expect RBI to cut interest rates in its policy next Tuesday.
Again, an overwhelming 90% said no CRR cuts either but the market will watch for more than just rate action. It will watch for the RBI’s GDP forecast. The prevailing forecast given in the April policy is 7.3%. After the 5.3% shocker for the Q4 of last year GDP forecast and confidence have fallen thick and fast.
Of the total, 90% respondents said, RBI will lower its forecast. Of these one half said GDP forecast will be lowered to between 6.6% and 7.2%. The other half said, it will be lowered to between 6% and 6.5%. 10% said RBI will retain it at 7.3% but warned it will lower the number in October after taking stock of the monsoons.
When asked about their own forecast, 75% expect GDP to come in at 6-6.5%. 15% see it above 6.5% and 10% actually said GDP will come in below 6% that is five point something. If that happens, it will be for the first time since 2002.
So, why won’t the RBI cut rates despite such dismal growth forecasts?
The answer lies in the inflation forecasts.
While a majority of 55% said the RBI will leave the March end inflation forecast unchanged at 6.5%, 45% said RBI will raise the forecast. Of this 25% said the inflation forecast will be upped to 6.5-7% and other 20% said it will be raise above 7%.
Respondents themselves were more skeptical of inflation falling. 50% saw March end inflation above 7%, 40% saw it between 6.5% and 7% and just 10% saw it at 6.5% or lower.
Inline with the lower growth forecasts 40% said RBI will lower the bank loan growth forecast from the current 17%. 60% said RBI won’t change these numbers till the October policy.
Finally, the market will watch out for RBIs stance, its guidance. 60% said the guidance will not be different from the June policy where RBI warned of inflation and explained the unimportance of interest rates to the current slowdown. 40% said no, the RBI will soften its stance and guide that it will stand ready to help.
Samiran Chakrabarty, Chief Economist, Standard Chartered says, “I would like to believe that their guidance is what they will follow and if I follow their guidance then it looks to me that there should not be any rate cut on Tuesday. It seems that RBI has taken a stance that interest rate is not the reason why growth is slowing down so interest rate cut is also not going to revive growth. At the same time it might reignite the fears of inflation.
We have taken a call that this is going to be a pretty long halt for the Central Bank where if they really want to get into a situation where inflation comes down to their comfort level of 5-6% then they will have to be patient, you cannot possibly flip-flop on policy every three months changing your target, changing your assumptions.”
Manish Wadhawan, HSBC, however, does not seem to agree. According to him, “I would be in the minority camp and I would say given the push which is being talked about by the government and the way the things are panning out I expect that RBI might surprise with a 25 basis point cut this time.
If you see the market levels also, we have already seen the market started factoring in some kind of policy easing in terms of if you see the CD rates three months back and today where we are, they are down by something by 50-75 basis point. The government of India bond yields 10 year paper is down by something like 30-40 basis points from the peak it achieved in January-February.
The markets already to some extent factoring in that and I am also putting in one more factor which is the doubt situation which is still uncertain. I think putting all the pieces together there is a probability of a rate cut and RBI might surprise in that.”
Again, an overwhelming 90% said no CRR cuts either but the market will watch for more than just rate action. It will watch for the RBI’s GDP forecast. The prevailing forecast given in the April policy is 7.3%. After the 5.3% shocker for the Q4 of last year GDP forecast and confidence have fallen thick and fast.
Of the total, 90% respondents said, RBI will lower its forecast. Of these one half said GDP forecast will be lowered to between 6.6% and 7.2%. The other half said, it will be lowered to between 6% and 6.5%. 10% said RBI will retain it at 7.3% but warned it will lower the number in October after taking stock of the monsoons.
When asked about their own forecast, 75% expect GDP to come in at 6-6.5%. 15% see it above 6.5% and 10% actually said GDP will come in below 6% that is five point something. If that happens, it will be for the first time since 2002.
So, why won’t the RBI cut rates despite such dismal growth forecasts?
The answer lies in the inflation forecasts.
While a majority of 55% said the RBI will leave the March end inflation forecast unchanged at 6.5%, 45% said RBI will raise the forecast. Of this 25% said the inflation forecast will be upped to 6.5-7% and other 20% said it will be raise above 7%.
Respondents themselves were more skeptical of inflation falling. 50% saw March end inflation above 7%, 40% saw it between 6.5% and 7% and just 10% saw it at 6.5% or lower.
Inline with the lower growth forecasts 40% said RBI will lower the bank loan growth forecast from the current 17%. 60% said RBI won’t change these numbers till the October policy.
Finally, the market will watch out for RBIs stance, its guidance. 60% said the guidance will not be different from the June policy where RBI warned of inflation and explained the unimportance of interest rates to the current slowdown. 40% said no, the RBI will soften its stance and guide that it will stand ready to help.
Samiran Chakrabarty, Chief Economist, Standard Chartered says, “I would like to believe that their guidance is what they will follow and if I follow their guidance then it looks to me that there should not be any rate cut on Tuesday. It seems that RBI has taken a stance that interest rate is not the reason why growth is slowing down so interest rate cut is also not going to revive growth. At the same time it might reignite the fears of inflation.
We have taken a call that this is going to be a pretty long halt for the Central Bank where if they really want to get into a situation where inflation comes down to their comfort level of 5-6% then they will have to be patient, you cannot possibly flip-flop on policy every three months changing your target, changing your assumptions.”
Manish Wadhawan, HSBC, however, does not seem to agree. According to him, “I would be in the minority camp and I would say given the push which is being talked about by the government and the way the things are panning out I expect that RBI might surprise with a 25 basis point cut this time.
If you see the market levels also, we have already seen the market started factoring in some kind of policy easing in terms of if you see the CD rates three months back and today where we are, they are down by something by 50-75 basis point. The government of India bond yields 10 year paper is down by something like 30-40 basis points from the peak it achieved in January-February.
The markets already to some extent factoring in that and I am also putting in one more factor which is the doubt situation which is still uncertain. I think putting all the pieces together there is a probability of a rate cut and RBI might surprise in that.”
