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RBI Promises Rate Cut In Jan

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The Reserve Bank on 18 December decided to keep key interest rates unchanged but provided sufficient hints that it would reduce them in January, giving some comfort to industry and banks which have been clamouring for a rate cut for quite some time. Saying it was shifting its focus to give a boost to the slowing growth, the central bank raised odds for a rate cut in the next policy review in January 29, 2013. The BSE benchmark Sensex closed over 120 points higher with rate sensitive banking and realty stocks attracting good buying on optimism of RBI easing monetary policy next month.

The 30-share index jumped after RBI announced its mid quarter policy review and ended with a gain of 120.33 points, or 0.63 per cent, at 19,364.75.

"In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to threats to growth from this point onwards," RBI Governor D Subbarao said in the mid-quarter monetary policy review.

The Reserve Bank of India (RBI) left the short-term lending (repo) rate and the cash reserve ratio -- the amount of deposits banks have to park with RBI-- unchanged at 8 per cent and 4.25 per cent, respectively.

RBI said that it is closely monitoring the evolving growth-inflation dynamics and it is likely to ease monetary policy in the January-March quarter.

The third quarter review will be unveiled on January 29.

Dipen Shah, Head of Fundamental Research, Kotak Securities said: RBI left policy rates unchanged maintaining status quo, in line with expectations. However, it has re-emphasized its guidance of repo rate cut in Q4.  In view of stabilising economy and tapering inflationary expectations, we expect a rate cut in January policy. We retain our expectation of 50 bps rate cut in Q4FY13 to end fiscal year with repo rate at 7.5 per cent. However, risk to inflation at 7.5 per cent by March remains.”

"We expect a 75-100bps cut in repo rates in calendar year 2013. Though CRR cut would disappoint a large section of street, RBI would actively manage liquidity conditions through OMOs to support the growth recovery," said Amar Ambani of IIFL.

Leif Lybecker Eskesen, Chief Economist for India & ASEAN, for HSBC Bank said: The RBI danced to its own tune and kept the policy rate on hold in light of the persistence of inflation and lingering upside risks to inflation. However, it is gearing up for potential policy rate cuts early next year, assuming inflation risks recede and policy progress on other fronts is sufficient.

Bankers felt that RBI would keep the promise and cut key interest rates next month giving them a leeway to pass on the benefits to retail consumers and corporates.

"I don't think banks will change their lending or deposit rates at the moment," Oriental Bank of Commerce CMD S L Bansal said, adding banks would consider a rate cut once RBI softens monetary stance.

HDFC Vice-chairman and CEO Keki Mistry said: "We will see lower interest rates in 2013. I expect RBI to cut rates by 0.50 per cent before March and more rate cuts from April."

As regards the corporate sector, industry chambers expressed disappointment but took satisfaction from RBI's guidance that the central bank would consider a rate cut in the January policy review.

Weak GDP Performance

The central bank has repeatedly resisted pressure from the finance ministry to cut rates to prop up an economy that has posted GDP growth below 6 per cent for the past three quarters and is on track for its weakest annual performance in a decade in the fiscal year ending March.

Whilst such a growth rate is still robust by the standards of developed economies, it is worryingly sluggish for a country that aspires to annual expansion of at least 8.5 percent to provide jobs for it burgeoning population.

"I think it is good that RBI sees there is room to ease and clearly they are taking a decision, keeping in mind their main job is combating inflation," said Raghuram Rajan, chief economic adviser to the finance ministry.

"But they also have some incentive to seek growth in the country."

Read Also: India Lowers Growth Forecast

The 10-year bond yield fell 3 basis points to 8.14 per cent from levels before the decision, reflecting somewhat heightened expectations of a rate cut early in 2013. The benchmark stock index was flat.

"Liquidity conditions will be managed with a view to supporting growth ... thereby preparing the ground for further shifting the policy stance to support growth," the RBI said.

The Congress-led UPA government, faced with threats of sovereign rating downgrades due to a widening fiscal deficit, is trying to pass key reform bills allowing greater access to foreign investors in the retail, banking and insurance sectors.

Appreciating the government's recent policy initiatives, the central bank said such moves along with further reforms should boost business activity and investment climate.

Standard & Poor's last week issued another warning to India's credit rating, saying a wide fiscal deficit and a heavy debt burden were the most significant rating constraints.

The wholesale price index (WPI), India's main gauge for inflation, softened to a 10-month low of 7.24 per cent in November. It has remained above 7 per cent for the past three years.

"Signs in softening RBI guidance is apparent as focus has shifted to growth, and odds for a rate cut in the January-March quarter are likely to gather considerable momentum here on," said Radhika Rao, an economist at Forecast Pte in Singapore.

"Barring a sharp acceleration in December WPI, we look for a 50 basis points reduction in Q1 2013, possibly front-loaded in the January meeting."

(With Agencies)