“Although headline and core WPI inflation continues to decline sharply and are at multi-year lows, the RBI had no choice but to maintain status quo on the Repo rate front, on account of the 9% depreciation in the Rupee since 1st of May.
The US Dollar has been strengthening, particularly against countries with high Current Account Deficits (CAD), on improving US economic data and fear of premature withdrawal of the bond buying programme by the Federal Reserve. India has the 2nd largest CAD in the world in absolute terms and faces the risk of further depreciation of its currency. The RBI would like to wait to see the impact of the depreciation on inflation and also action from the government to reign in the CAD. In any case, significant monetary transmission of the 75 basis points cuts in 2013 is yet to take place. The CRR has been left unchanged and the RBI’s focus will be to reduce the liquidity deficit, which stands at over Rs1 trillion.
While it is not clear if the Governor will cut rates in the next policy review, we expect an incremental 50-75 basis points Repo cut till March 2014. This is based on the likelihood of subdued global commodity prices, normal monsoons, deceleration in consumption momentum and some stability in the INR in the coming months”.