RBI remains guarded RATE CUT HOPES FUEL BULLS AT SENSEX, NIFTY
Apex bank said there is a very limited space for action
The Reserve Bank of India (RBI) has been very cautious in revealing its mind about Friday’s annual credit policy stance in the Macroeconomic and Monetary Developments in 201213 report released on Thursday, ahead of the Monetary Policy Statement to be announced on Friday.
The majority expectation among banks and analysts is that the RBI would cut policy rates by at least 25 basis points (a quarter per cent) if not 50 basis points. SBI chairman Pratip Chaudhuri said if there is a one per cent cut SBI would reduce its lending rates by 20 basis points immediately.
The report stresses on inflation risks, particularly the double digit consumer price index because of high food prices, and the headline inflation remaining above the comfort level of the bank, and says there is “very limited,” space for action. It also said that the “large and continuous” stimulus packages by the global central banks could cause some risks. It indi- cates that there is a possibility of a quarter per cent cut in policy rates, which would be a booster.
Whilst admitting “slowdown persists in the economy” the report puts the ball in the government’s court saying “Growth is hobbled by structural bottlenecks.
Shortages of power, coal and natural gas, stoppage of mining activity in some states following legal enforcements on illegal mining have emerged as a major constraining factor for industrial growth. Core industries have under-performed in this backdrop.”
The report sees a slowpaced recovery likely later in 2013-14, but says it is “contingent on improved governance and concerted action to resolve structural bottlenecks, especially in infrastructure sector. Output gap is likely to reduce, but remain negative.” The report indicates that an interest rate cut is not going to help stimulate growth. Defying a broader weakness in Asian stocks, the domestic markets climbed to their three-month high led by interest rate sensitive banking sector stocks on hopes that the RBI would cut interest rates on Friday.
The Sensex climbed 231.59 points or 1.19 per cent to close the day at 19,735.77 while the Nifty settled the day at 5,999.35, up 69.15 points or 1.17 per cent. FIIs did massive buying on Thursday lapping up stocks worth `1,429.94 crore, the provisional data from the stock exchanges showed. “A one-sided rally has been seen from the Nifty’s low of 5,477 level and Friday would be a decisive day for the near-term trend as all focus is on RBI’s monetary policy,” said Nidhi Saraswat of Bonanza Portfolio.