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RBI may not cut rates unless inflation falls

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Moneylife Digital Team | 03/12/2012 05:18 PM | 

RBI has become more mindful of growth risks and it is unlikely to shift from its anti-inflationary stance till inflation peaks out, says a Kotak Economic Research report


Despite slowing further to 5.3% in 2QFY13 from 5.5% the previous quarter, economic activity is stabilizing at current levels and is likely to see a saucer-shaped recovery going ahead, according to a Kotak Economic Research report on the Indian economy today. The Kotak report maintains its FY2013 GDP estimate at 5.6%, with slight improvement in FY2014 to 6.2%.

 

According to the Kotak report, even as the RBI (Reserve Bank of India) has possibly become more mindful of growth risks, it is unlikely to shift from its anti-inflationary stance till inflation peaks out. Hence, Kotak does not expect any policy action in the 18 December 2012 mid-quarter policy meeting.

 

The Kotak report observes that liquidity in December is likely to remain tight given:

(1) advance tax outflows,

(2) continued wedge between credit-deposit, and

(3) likely pick-up in currency in circulation due to state elections.

 

With the RBI resuming OMOs (open market operations) for liquidity management, the possibility of a CRR cut in the December meeting has significantly reduced but a final call can be taken closer to the policy meeting, says the Kotak analyst.

 

On the agriculture sector, the Kotak report says that the full impact of a likely sub-par kharif harvest would be felt in 3QFY12 with a contraction in agriculture growth acting as a drag on growth. It expects agriculture sector growth to fall sharply to 1% in FY2013 from 2.8% in FY2012 and pick up to 2.0% in FY2014, helped by low base effect and expectation of a normal monsoon.

 

The Kotak report does not expect much recovery in the capex cycle and consequently expects the industrial sector to register a muted growth of 1.7% in FY2013.

 

Lastly, the Kotak report observes that the drop in government spending in the current quarter may further impact the private consumption slowdown. Private consumption has been slowing (3.7% in 2QFY13 compared to 4.0% in 1QFY13) partly due to sustained high inflation. It does not expect dramatic downward correction as rural wages continue to remain strong, although slowing, keeping rural consumption relatively insulated. It expects the services sector growth to be at 7.6% in FY2013 against 8.5% in FY2012.


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