Mumbai: A fortnight before the mid-quarter policy review, Reserve Bank of India (RBI) deputy governor Subir Gokarn hinted at a possible rate cut, prompting a rise in bond and share prices as the markets responded positively to the signal. Adding to optimism was the prospect of a normal monsoon, with the first rains of the season expected to make landfall in Kerala by 6 June.
“Growth is somewhat lower than expectations and that may have (a) positive, moderating impact on core inflation. Two, oil prices have come off somewhat more than expected. Those are the two factors that suggest more room (for monetary policy),” PTI reported Gokarn as saying on the sidelines of an event in the city.
The yield on the 10-year bond fell to a two-and-a-half-month low of 8.31% after Gokarn’s statement. Bond prices and yields move in opposite directions. BSE’s benchmark Sensex closed at 15,988.40 points, up a marginal 0.15%, recouping losses after Gokarn’s statement. Interest rate-sensitive bank shares rose, with the Bankex closing up 1.1% at 10,802.52.
The deputy governor echoed sentiments expressed by finance minister Pranab Mukherjee. The rapid fall in global crude oil prices could help the central bank cut interest rates further because inflationary pressures will decline, Mukherjee reiterated on Monday. He admitted that the general economic gloom meant there were constraints on what could be done.
“The second round of global uncertainty and the slowdown have come rather quickly on the heels of the previous one, with practically no headroom for running a proactive fiscal policy,” Mukherjee said at a conference in New Delhi on Monday.
Crude oil prices fell below $100 (Rs5,550 today) a barrel last week, the first time they have done so since October, as the euro zone crisis persisted and weak manufacturing data from China raised concerns that demand for crude would fall. On Monday, London Brent crude was trading at $97.79 a barrel at 9.21pm India time. India’s gross domestic product (GDP) growth for the fourth quarter (Q4) of fiscal 2012 (FY12) was a dismal 5.3%—a nine-year low.
The decline in oil prices has, however, been almost negated by the slump in the rupee’s value against the dollar.
The rupee fell to its all-time low of 56.51 last week, a fall of about 20% from its year-ago level. On Monday, it rose 0.2% to 55.65 per dollar. The recent decline in the value of the rupee would also have made stocks cheaper for overseas investors seeking bargains.
Gokarn said softening core inflation is providing the central bank with some room for paring rates. Core inflation, or inflation in “non-food manufactured products”, in April was still below 5%, which is consistent with RBI’s trajectory, Gokarn said. On an aggregate basis, though, Wholesale Price Index-based inflation rose to 7.23%, higher than estimates.
When the central bank cut its key lending rate by half a percentage point on 17 April, it had said that inflation risks “inherently limit the space for a further reduction in policy rates”.
The GDP deflator—an implicit measure of inflation used while converting nominal GDP into real GDP—has come off a bit from 10.78% in Q4 of FY11 to 9.59% in Q4 of FY12, according to a Mint calculation.
According to the latest HSBC Markit Economics manufacturing Purchasing Managers’ Index for India, input and output prices are showing signs of easing. The sub-index for input prices fell to 64.2 in May from 64.8 in April. The output price index has inched to 57.8 from 58.7. A reading above 50 indicates expansion.
But the room for rate cuts is being offset by other factors.
“Food inflation came out rather high in the April numbers. We are waiting and watching to see what happens in May. The deficit remains a concern,” Gokarn said in comments on the CNBC-TV18 television channel. “Everything isn’t pointing exactly in the same direction. So, we have to maintain that balance.”
Food inflation in April hit 10.49%—the first time it was in double digits in six months.
Based purely on the growth figures, economists see a rate cut as imminent.
“We think the current growth backdrop warrants more monetary action to support growth,” said Samiran Chakraborty, head of India research at Standard Chartered Bank.
“In the urgency of controlling inflation over the last two years, focus on growth has taken a backseat. Some of the growth slowdown is an intended outcome of tight monetary policy, but now a pro-growth bias needs to be initiated in policymaking to improve business confidence,” Chakraborty said.
However, a rate cut may not be enough to lift absolute growth.
“Ideally, we should have an easy money policy and a tight fiscal policy, but that is not the case now. RBI may go for another 50 basis points cut, but can’t do anything after that to control global imported inflation,” said Rupa Rege Nitsure, chief economist at Bank of Baroda. “Unless we take care of the structural issues, like land acquisitions, policy paralysis, coal linkages, etc., rate cuts won’t be able to help the promoters much.”
A basis point is one-hundredth of percentage point.
After 13 hikes in policy rates, RBI cut its repo rate, or the rate at which it infuses liquidity into the system, by half a percentage point to 8% on 17 April. The next RBI policy announcement is due on 18 June.
Remya Nair in New Delhi and Sunil B.S. in Mumbai contributed to this story.
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