RBI DID THE RIGHT THING - MAINTAINS STATUS QUO

By Ruma Dubey

It came as no surprise at all! RBI kept the repo rate and CRR unchanged. For once the markets had it right and Dr.Subbarao did exactly what the market expected him to do!

Given the hawkish stance of RBI on inflation, this was very much on the expected line. Though WPI was at a 33-month low, retail inflation remained stubbornly high around 10%. We are sure to see a spike up in WPI and CPI in coming months as; to begin with, most auto companies have announced price hikes in Jan 2013. So going ahead, inflation will continue to remain a struggle and it is right for RBI to keep its watch on prices. And frankly, January is just a month away, so it is not like we are going to be waiting for another quarter!

RBI has stated that it will look at rate cuts only in first quarter of 2013. And that is the very good news here. When the rate cut comes now, it will not be a token 25 bps but it could mostly be a healthy 50 bps cut. Right now, many big banks are expected to announce token base rate cuts and this will in itself boost sentiments. If banks, despite RBI not cutting rates, goes ahead and cuts rates, even if 10-15 bps points, it will at least ease a bit of the liquidity situation.

Once again, one cannot help but applaud RBI Governor, Mr.Duvvuri Subbarao. He is one of the few Govt bureaucrats we have today who has not bowed down to pressure from the Govt and the market and decided to stick to his guns, to his hawk eyed view on inflation. He comes forth as a person who is idealistic and we should be happy that we have today one person in India who stood by his conviction. Today most of the people in power that we have are people who stand up for nothing and hence fall for everything.

There is worry that this would send the wrong message to the FIIs. But is that really so? RBI did not sway, did not give in to pressures and did what was best for the country and not what was best for the markets. If FIIs cannot see and respect this, then well, the market is surely made up of gamblers and opportunists and that is not good for the country. We managed to come through virtually unscathed during the Lehman collapse because of this hawkish stance of RBI. Today if India is in a bind, it is due to Govt inaction and that is a terrible message being sent across. Well, at least the Govt had got into some action mode and is doing its bit to push through as many reforms as it can before this session of the Parliament ends.

The Govt is indeed trying to put in place a growth package and what is needed more than liquidity, right now, is that all regulatory impediments are overcome and projects start getting off the ground. There is excessive focus on repo rates and this seems misplaced at the moment as even a 50 bps rate cut would be more about sentiments but the real change will happen only when projects take off. The economy will take its own course and softening of interest rate is a given but the Govt needs to work overtime to push growth. There is consumption in the economy as that is more income based. So liquidity is really not the issue. And neither will a rate cut suddenly push up growth.  More than demand, the economy is struggling due to supply issues, problems more of implementation – availability of raw material, coal, and land issues. Only when this gets resolved will liquidity will come into focus and only then will rate cuts matter.

Looking ahead, maybe it is time for one to go long on private sector banking stocks. And there is no doubt that more than sectors, it is interest sensitive stocks and interest senstive sectors like auto, realty, which will do well in the coming months.