Markets expect budget to facilitate rate cut

The markets are expecting a rate cut cycle starting in April if the Union Budget 2012-13 could create space that the Reserve Bank of India (RBI) needs to embark on. “The persistence of inflationary pressures due to elevated oil prices, weak rupee and extreme fiscal excesses has prompted the RBI to keep its policy rates unchanged in Thursday's policy meeting. A credible commitment by the government towards fiscal consolidation in the budget could create the space that RBI needs to embark on the rate cut cycle in April,” said Upasna Bhardwaj, Economist, ING Vysya Bank. The benchmark BSE index fell for the first time in five sessions on Thursday as sectors sensitive to interest rates such as banks and real estate firms dropped after the RBI kept its policy rate unchanged. Further, the uncertainty, going forward, predicted by the RBI sent a negative sentiment across market participants. The 30-share BSE index ended at 17675.85, down by 243.45 points or 1.36 per cent. A broader 50-share NSE S&P CNX Nifty fell by 83.40 poits or 1.53 per cent to close at 5380.50. All sectoral indices ended in the red. The fall was led by consumer durables with 3.66 per cent, realty 2.66 per cent and banks 2.60 per cent. It is quite evident that the RBI would partly base its decision to cut policy rate, on the emerging core inflation figures and developments on oil and other commodities front. It appears that RBI is comfortable with current GDP growth rate of 6 per cent plus and is not in a hurry to boost growth. Due to weak domestic demand and higher base effect, the core inflation is expected to moderate further in 2012-13. This would provide room for RBI to cut rates and boost growth, said Shyam Srinivasan, MD & CEO, Federal Bank. He expects 150 basis point cut in Repo rate in 2012-13. “The status quo on policy rates indicates that the central bank would prefer to decide on its future course of action after gauging the overall size of government borrowing post-budget session,” said Yadnesh Chavan, Head-Debt, Mirae Asset Global Investments (India) Pvt. Ltd: The policy document also made it evident that the Reserve Bank might not consider rate cuts unless it saw strong signs of fiscal consolidation. In addition, current prices of fuel, fertilizer and power did not fully reflect free market prices leading to suppressed inflation levels and exerting pressure on the fiscal deficit front, Mr. Chavan added. Having already cut its CRR by an aggressive 75 basis points last Friday to ameliorate excessively tight liquidity conditions in recent weeks, not too much was expected of today's [Thursday's] review, said Abheek Barua, Chief Economist, HDFC Bank. The central bank had already indicated in its last meeting that any policy rate action going ahead would be contingent on the extent of fiscal consolidation the government would target in financial year 2012-13. This, however, will become clear only tomorrow [Friday] and a repo rate cut today [Thursday] would, therefore, could have been construed to be premature, Mr. Barua added.