RBI policy actions for fiscal 2012-13 include repo rate cut of 75bps, CRR (Cash Reserve Ratio) cut of 75bps and SLR (Statutory Liquidity Ratio) cut of 100bps. In addition to policy rate cuts, the central bank has added Rs 130,000 crores of liquidity into the system through bond purchases. On a daily basis RBI is lending around Rs 80,000 crores to Rs 100,000 crores to banks for their daily liquidity requirements. An impartial observer will look at RBI actions as a pro growth stance by the central bank throughout fiscal 2012-13 though the markets have only focused on the repo rate.
The total liquidity infusion by the RBI into the system in 2012-13 amounts to around Rs 245,000 crores excluding LAF (Liquidity Adjustment Facility) lending. CRR cut of 75bps has released around Rs 55,000 crores of liquidity while the SLR cut of 100bps has released around Rs 60,000 crores of liquidity into the system. RBI’s liquidity infusion coupled with 75bps of repo rate cut at a time when inflation has been trending at 7.25% to 8% range is more than what one could ask for. The government should take note of RBI’s monetary easing while markets should be pleased with the latest round of 25bps repo rate cut and 25bps CRR cut.
RBI’s monetary easing for 2012-13 is yet to show up in economic and monetary aggregates. GDP growth forecast by the central bank is down to 5.5% for 2012-13 against earlier estimates of 5.8% and 6.5%. Bank credit growth at 16% levels as of January 2013 is lower than the 18.7% growth seen at the beginning of the fiscal while broad money supply (M3) growth is down to 13% from 13.7% levels. Bank deposit growth is down from 14.3% levels to 13.3% levels. However RBI’s easing has helped arrest a steep decline in growth and monetary aggregates.
RBI has been calling CRR cuts, SLR cuts and bond purchases as liquidity boosting measures, which in effect it is. However such measures are a direct form of monetary easing and when done in conjunction with repo rate cuts adds to the growth prospects of the economy. Equity and bond markets have benefitted from the monetary easing policies of the RBI with the Sensex and Nifty higher by 15% since April 2012 and benchmark ten year bond yield down by 60bps.
Looking ahead, will RBI oblige markets by reducing repo rates further? RBI’s guidance suggests that the central bank is more growth focused than inflation focused. Its assessment of inflation is more benign despite temporary effects of fuel price hike on headline inflation. RBI’s has revised down March 2013 WPI (Wholesale Price Inflation) to 6.8% from 7.5% projected earlier. The central bank expects WPI to stay around 7% in the coming fiscal year. RBI is likely to lower the repo rate by 25bps in March 2013 if the government shows a lower fiscal deficit for fiscal 2013-14 in its budget and this repo rate cut will seal its efforts on growth push for this fiscal.
Equity and bond markets will welcome the 25bps repo rate cut and CRR cut. The Sensex and Nifty will head higher on positive budget expectations while bond yields will fall on expectations of lower fiscal deficit for 2013-14 and on expectations of a repo rate cut in March.
The Indian Rupee (INR) has been a stark underperformer compared to equities and bonds. The INR is down over 5% fiscal year to date largely on the back of a rising CAD (Current Account Deficit) that rose to record levels of 5.4% of GDP in the second quarter of this fiscal. The INR should start performing going forward on expectations of improved economic growth, stable inflation expectations and better government finances for the coming fiscal.
RBI has done its bit for the economy and markets should sit up and take notice.