“After raising nerves with its cautious statement on the policy eve, the RBI calmed markets by lowering the Repo rate by 25 basis points. The market was also hoping for a CRR cut which didn’t come through. Weak deposit mobilization and lower government spending continue to pressurize system liquidity in a modest credit growth environment but the RBI will look at managing liquidity through Open Market Operations in the coming months.
The liquidity deficit situation has somewhat improved in recent months but still far away from the comfort zone that RBI desires. It seems unlikely that any material monetary transmission would take place on account of the Repo cut; the reason being that in spite of the 50 basis points Repo cut over the previous two meetings coupled with a CRR reduction and OMOs, banks reduced their base rate by a small magnitude of 10-25 basis points only.
With 75 basis points already coming through from January to date, the RBI has front loaded its monetary policy action and the scope for any further cut is ‘little’ as the RBI itself puts it. The hawkish statement by the Governor reaffirms our belief. We expect not more than 25 basis points incremental reduction in Repo till December 2013.
With RBI’s GDP growth expectation of 5.7% being much lower than Government’s number, the former will not be compelled to act in a hurry in case of further moderation in the growth rate. Also, the RBI’s intention of lowering inflation to 5% by March 2014 signifies it will have to maintain tighter control on policy, especially if the monsoon is not normal.”