Wednesday, April 2, 2014

Indian Central Bank Stands Pat

The Reserve Bank of India (RBI) left the benchmark repurchase rate unchanged at 8% Tuesday, with the cash reserve ratio and reverse repurchase steady at 4% and 7%, respectively. The move was as expected, with the rhetoric still predominantly cautious on inflation, while downside risks to growth were highlighted. 

The moderation in the consumer price inflation was acknowledged, but mainly pinned on the disinflation in food prices, outside of which price pressures continue to be supported. With vegetable prices expected to have entered their "seasonal trough", the RBI does not expect further softening from current levels. 
 
Looking ahead, inflation prints face upside risks in the June quarter of this year and the March quarter of next year, while the September and December quarters are capped by favourable base effects. The central bank will also need to factor in the fiscal leaning of the new government beyond May. In this regard, the budget to be tabled in June or July will be a litmus test to gauge their economic priorities, especially on aspects like the minimum support prices and administered products. 
Downside risks to growth also received a mention, with real GDP growth projected to pick up from sub-5% in this fiscal year to 5%-6% in 2014/15, close to our estimates. Potential GDP was "lower than 6%", suggesting that the output gap was at about 1%. That said, the central bank governor is unlikely to consider rate cuts to boost growth, given the central tenet that there was no trade-off between inflation and recovery. Low and manageable inflation is in fact seen as a necessary pre requisite for sustained pickup in growth. 
The upcoming elections add an event risk to the policy horizon along with the likelihood that poor weather conditions might feed into inflation yet again. At this juncture, the RBI will prefer to remain in wait-and-see mode to gain more clarity on the data outruns. The stable rupee also helps in this regard. We expect the rate trajectory to flatten here on, with no change likely at the next review in early-June. By then, the May election results will also be on hand, but a close-to-expectations outcome is unlikely to see the central bank throw caution to the air. The tight hold on policy levers is expected to remain in place.