Fears on inflation and fiscal deficit drive RBI to safety
RBI chose to take fresh guard after delivering an aggressive 75 bps CRR cut ahead of schedule. The delivery was reflective of market consensus but post-policy weakness in stock and bond market does not confirm to delivery to the gallery. There is sign of disappointment on RBI not getting into rate cut mode. In its guidance, RBI has chosen to play safe with limited confidence on downtrend in inflation triggered by headwinds from weak rupee; high crude oil price and slippage in fiscal deficit. RBI has also recognised deceleration in growth momentum. While there is affirmation on the need to cut policy rates going ahead, the timing and magnitude is left open.
What is the impact on markets? The delay in rate cut action will push markets into consolidation mode with NIFTY at 5200-5500. The resistance from within UPA on price hike in the Railway Budget highlights the fact that FM will be in tight spot to manage fiscal deficit within acceptable levels. This may be one of the reasons to drive the Governor into wait-and-watch stance. 10Y bond yield now will shift into a higher range of 8.25-8.50% and 5Y OIS rate at 7.45-7.70%. The bullish set up into FY13 stays diluted at this stage and any unpleasant surprises from the Budget will get the markets into bearish mode with limited pleasant surprises in store.
Moses Harding
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