The RBI governor Dr. D. Subbarao is saying he is hawkish on rates but his actions suggest that he is dovish on rates. The Central Bank cut the benchmark policy rate, the repo rate by 25bps in its annual policy statement today. The markets were largely expecting a 25bps repo rate cut but it received a scare when the Monetary and Macroeconomic Developments 2012-13 document released on the 2nd of May 2013 opened with the statement that “there is limited space for monetary action in 2013-14”. The governor is reiterating that there is limited space for monetary action henceforth but he has not explicitly spelt out the depth of the space.
RBI is dovish going by the annual policy forecasts. GDP growth for 2013-14 is placed at 5.7% against government’s growth rate of 6.4% and against professional forecasters estimates of 6%. Inflation as measured by the WPI (Wholesale Price Index) is forecast at around 5.5% against professional forecasters estimates of 6.5%.
Monetary aggregates estimates of broad money supply (M3) at 13%, deposit growth of 14% and non food credit growth of 15% are close to levels of 13.3%, 13.5% and 13.9% respectively seen in the last fiscal.
RBI’s growth, inflation and monetary aggregate estimates are on the lower side indicating that the central bank is not seeing any signs of the economy heating up leave alone overheating. In fact RBI sounds pessimistic on economic growth and benign on inflationary expectations.
RBI is concerned on the current account deficit (CAD), as it believes that the right level for the country is 2.5% of GDP. CAD is estimated at around 4.5% of GDP for 2013-14 though it could fall more if global oil and gold prices continue to stay down. However the fact the CAD is being financed fully by capital flows reduces part of the worry of a high CAD but this kind of financing of the CAD leaves the economy vulnerable to external shocks. The central bank is appreciative of the government lowering its fiscal deficit to levels of 4.8% of GDP from 5.2% of GDP seen in the last fiscal.
The RBI policy stance for 2013-14 is to address “accentuated” risks to growth, guard against inflation pressures and manage liquidity to ensure adequate credit flow in the economy. In the same breath the central bank is saying there is limited space for monetary action in its guidance statement.
RBI is clearly keeping market expectations low on further policy actions but going by its estimates for growth, inflation and monetary aggregates, there is high probability of more rate cuts going forward.