>Peaking of interest rates turns focus on banks, capital goods, real estate and consumer durables where demand is closely linked to borrowing rates.

Predictably, rate-sensitive indices led the way for arise in the broader indices as the Reserve Bank of India(RBI) again emphasised a peaking of the interest rate cycle inits reviewof theMonetary Policy today. The RBI Governor reinforced the guidance that further policy actions would most likely reverse the cycle by lowering policy rates. The central bank cut Cash Reserve Ratio (CRR) maintained by banks by 50 basis points (bps) to 5.5 per cent of their net demand and time liabilities (NDTL) effective from January 28, 2012 that would release about Rs 32,000 crore into the banking system. 


The move would reduce liquidity pressure which, the Governor stated, has been tight and beyond the RBI’s comfort zone of 1% of NDTL with a net liquidity injection of over Rs 70,000 crore by the RBI through open market purchase of government securities.


The policy stance was influenced by this significant increase in the structural deficit in the system which, according to the RBI, could hurt the credit flow to productive sectors of the economy. This, therefore, necessitated a permanent primary liquidity injection into the system especially ahead of further stresses expected from upcoming advance tax outflows.


SLOWING GROWTH
While keeping the key policy repo and reverse repo rates unchanged at 8.5 and 7.5%, the RBI noted that growth is decelerating and inflation is moderating and therefore the next policy action would most likely cut rates.


The slowing growth reflects the combined impact an uncertain global environment, the net impact of past monetary policy tightening and domestic policy uncertainties. With credit offtake below projected trajectory, the central bank lowered its gross domestic growth projection for FY12 to 7% from 7.6% and stated that risks to growth have increased.


It noted that although headline WPI inflation is moderating, this largely reflects a sharp softening in prices of seasonal food items. In contrast, inflation of other key components, particularly protein-based food items and non-food manufactured products continued to be high. The upside risks to inflation were due to global crude oil prices, impact of rupee depreciation and fiscal deficit slippages.


THE ROAD AHEAD
While this shift in the GDP growth and inflation balance has led to a predictably dovish tone to the monetary policy guidance, the central bank has cautioned that future rate actions depend on policy and administrative actions towards fiscal consolidation.


Dr. Arun Singh, Senior Economist, Dun & Bradstreet believes that any policy rate cuts will only come after April 2012 when the inflation scenario becomes clear. A number close to 6 per cent will provide comfort for the Reserve Bank of India to proceed with rate cuts in its April 2012 monetary policy review, he says.


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RISH TRADER