RBI Credit Policy

The Reserve Bank of India's (RBI) macro-economic report has painted a gloomy picture about the Indian economy. It has lowered the FY13 GDP forecast between 6.5 and 7.2% and has noted the upside risk to inflation.

Highlights of macro economic report:

Growth:

The growth picture is pretty dismal. If we did 5.3% in the previous quarter we are likely to do no better in the current quarter. The dangers to growth come even from the global side, which looks pretty bleak now.

Inflation:

The consumer price inflation remains very sticky at double digits. It is not likely to go down because monsoon is questionable at the current juncture. Globally, the harvest is bad and a lot of economies worldwide are stimulating growth through cutting interest rates. Therefore, that could push up commodity prices.

Current account deficit:

The third major factor the report points out is the current account deficit. At the moment, we can't afford 4.2% current account deficit of last year although crude oil prices are falling, service and software exports have fallen.

The RBI has also pointed out that the Nasscom forecast cannot be met. Therefore, in the current year even 2.5% of current account deficit looks difficult to sustain.

No interest rate cut by RBI?

The conclusion one can draw from all this looks like given the inflation expectation and the current account deficit dangers the RBI is unlikely to stimulate demand by cutting interest rate at this juncture.

It believes that the government has to do its bit in the first place by cutting fiscal deficit and using that extra money to stimulate investment so that growth is generated, only then can space be created for monetary policy.

What does the poll indicate?

The CNBC-TV18 poll indicates something very similar although it was taken before the macro economic report. Ninety percent of people who were polled said they don't expect a repo rate cut. Only 10% expect a 25 bps repo rate cut. As far as the CRR is concerned, 90% do not expect a CRR cut; 5% expect 50 bps and another 5% expect a 25 bps.

The more important point that the market will watch out for will be the growth forecast of RBI. The GDP forecast in April was put in at 7.3, 90% of people who were surveyed said that they expect the forecast to be brought down. Of this 90%, 45% said it will be between 6.5 and 7.2.

The other half said it will be below 6.5% that is 6-6.5%. Ten percent people said it will be brought down to between 5.5% and 6%. So, there are people who expect GDP to come at 5 point something in the current year.

A large majority expect RBI’s inflation target to be brought up. Fifty five percent said it will be unchanged, 45% said it can be raised to 6.5% to 7% and few said even above 7%.

Sixty percent expect RBI’s stance to remain unchanged. Fourty percent believe that RBI can adopt a slightly dovish stance in the policy.