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RBI may cut rates by 50 bps in Sept-Dec: Nomura

If financing the current account is difficult, then rate cuts will likely be postponed further, Nomura says

June 18, 2013 12:10 IST | India Infoline News Service
The Reserve Bank of India (RBI) left policy rates unchanged at 7.25%, in line with consensus and our expectations, brokerage house Nomura said on Monday.

The cash reserve ratio was also unchanged at 4%, as expected, it added.

While acknowledging the recent moderation in WPI inflation and weak growth prospects, the RBI cited developments in the external sector as the most significant development. The RBI expects gold imports to moderate in June, but it also sees capital flows as having moderated this month.

The forward guidance suggests that the RBI’s policy stance is still biased towards cutting rates. According to the statement, “it is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth.” Essentially, the RBI is in data-dependent mode. The future policy stance will depend on the outlook for growth, inflation and the balance of payments situation.

Note that the RBI is now focused on the balance of payments and not just the current account deficit, which means that financing the current account deficit is important.

While growth-inflation dynamics still call for rate cuts, INR volatility and the ensuing concerns on financing the current account deficit are likely to determine monetary policy action. Hence, if INR stabilises and CPI inflation moderates, then rate cuts could follow, which is our base case view, Nomura further said.

On the other hand, if financing the current account is difficult, then rate cuts will likely be postponed further.

We pencil in 50bps of cuts to the repo rate in H2 2013 with CPI inflation and INR likely to determine the timing of the moves.

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