Economy: RBI Initiates Dovish Stance With Actions - Karvy Stock Broking

Key Highlights:

- Belying our expectations, the RBI cut CRR by 50bps to 5.5%, effectively injecting primary liquidity of Rs. 320bn. However it chose to keep policy rates intact.

More CRR cuts may be on the cards to reduce consistent liquidity deficit to near comfort levels and bring the overnight call rate closer to the LAF corridor. Meanwhile, possible rate cut may be delayed subject to fiscal consolidation in the upcoming budget.

- The knee jerk reaction was felt in the debt market with the street speculation that OMO buybacks will slow down with CRR being the preferred tool to tackle the liquidity deficit issue. This was further aggravated by RBI's continued abstaining from giving an indicative calendar for OMOs.

- The effective OMOs have been close to Rs 720bn and we expect another Rs. 300bn from the RBI's end to come despite the CRR cuts.

- The RBI acknowledged growth slowdown is more pronounced than envisaged, and as expected, revised down GDP growth forecast to 7.0%. Meanwhile, Inflation projections remain at 7.0%. However we reckon the statistical anomaly of base effect could as well be fleeting after April owing to structural primary and core inflation mismatches along with exchange rate pass throughs to surprise us as it did last year!

- We reckon much of the expected slowdown is in part due to policy design, despite a resilient agriculture growth and rural demand. Uncertainties revolving around inflation trajectory, governance issues and peaking of rate cycle made sure that industrial production remain a low key.

- Despite a clear dovish stance, RBI may be little wary of engaging in a substantial easing of monetary policy in 2012 unless global situation worsens immensely. With inflation expected to rise in 2H12, the weak currency driven imported inflation and fiscal consolidation are likely to pose a challenge for policymakers in FY13 too. On an immediate note, the RBI is likely to wait till at least the budget before switching focus to the policy rates to see the fiscal stance's sync with the monetary one.

Source : Equity Bulls

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