|Tuesday, 17 April 2012 00:00|
WPI slows, rate cut on cards, but more look dicey
With wholesale price inflation for March slowing to 6.89%, in line with Bloomberg estimates of 6.7%, most expect RBI to make a 25 bps cut in repo rates today, the first after three years of tightening during which time rates went up 375 bps, from 4.75% in March 2010 to 8.5% right now. Opinion is divided on whether the cut in repo rates will be accompanied by a cut in the CRR, or whether RBI will leave that for the next time around. Apart from headline inflation completely reversing over the past one year (from 9.6% in March 2011 to 6.9% in March 2012), RBI has also indicated it feels the government’s attempts to cut deficits in the budget are credible, strengthening chances of a rate cut.
But, assuming there’s a rate cut, the question is whether it will be the beginning of a series of rate cuts, an unwinding of the rate hikes since March 2010. With primary inflation actually rising quite steadily—from 2.76% in January to 6.28% in February and 9.62% in March—RBI’s room to manoeuvre seems limited, and the impact of the likely fuel hike has to be factored in (odds are it’ll happen after the budget session is over on May 22) as also the likely impact of the continuing fall in the value of the rupee. RBI’s pre-policy macro-statement yesterday indicated RBI thought inflation would remain at current levels but with considerable suppressed potential that needs careful monitoring. And despite RBI’s public stance on the budget’s fiscal correction, there is little evidence of this. Fertiliser subsidies are expected to fall by R6,225 crore with no plan even announced to cut them and oil subsidies are projected to fall by R24,901 crore—in other words, of the 0.8 percentage point fiscal correction, 0.3% of GDP is to come from these two iffy items of expenditure compression. Another R45,000 crore is to come from the 2G/4G auction and R30,000 crore from disinvestment—take all these away, and the genuine deficit compression is negative!
Not surprisingly, most analysts have reduced their expectations of a 100-125 bps rate cut over the year to 50-75 bps—some like JPMorganChase’s India chief economist Jahangir Aziz have argued in these columns (http://goo.gl/NZFsh) that today’s 25 bps cut will be the first and last for the year. If rate cuts are restricted to 50-75 bps, there is little chance of interest rates in the economy falling, especially now that banks are raising deposit rates to attract savers—as compared to 2009-10, deposit rates are up from 6-7% to 9.25%. That, in turn, means little respite for India Inc—a 300 bps hike in cost of funds reduces profits by around R80,000 crore. Is a 50-75 bps rate cut over the year enough to stimulate investment, which is the reason for the clamour for a rate cut? It’s difficult to say but a recent study by RBI’s economic and policy research division has an interesting take (see edit below this) on the cost of ‘policy paralysis’ outweighing most other positives when it comes to foreign investors. Not surprisingly, RBI’s pre-policy statement says FY13 recovery is likely to be slow.