n a note titled - 1Q GDP, RBI policy and the art of being Sherlock Holmes, HSBC Global Research says, low inflation at present coupled with a possible Fed exit later in the year, suggest a final rate cut now could be an opportunistic move. Considering all, HSBC forecasts a 25bp rate cut in the June 2 RBI policy meeting.
If Sherlock Holmes were a central banker, he may have remarked, "elementary, my dear Watson". Stronger than expected 1Q2015 GDP growth at 7.5% y-o-y and some inflation risks on the horizon are a logical mix for the central bank to not cut rates. But the truth is, factually speaking, Holmes never uttered those words, (at least going by Doyle's books). And it may not be so elementary a decision after all. Look closer. Majority activity indicators and GDP's own supply side estimates are in fact pointing to continued weakness in recovery. Furthermore, low inflation at present coupled with a possible Fed exit later in the year, suggest a final rate cut now could be an opportunistic move. Considering all, HSBC forecasts a 25bp rate cut in the June 2 RBI policy meeting.
The note authored by Pranjul Bhandari, Chief India Economist, Prithviraj Srinivas, Economist and Stuti Saksena, Economics Associate says while India's 1Q2015 GDP (on the demand side) grew 7.5% y-o-y, showing an almost 100bp increase from the (downward revised) 6.6% growth of the previous quarter, the same message was not carried on the supply side of GDP (known as GVA at basic prices), which grew 6.1% y-o-y, 60 bps slower than the 6.8% y-o-y growth in the previous quarter.
The note states that “Finally, we don't foresee a CRR cut just yet. Liquidity conditions currently are tight with a system deficit of over Rs 1 trillion, at about 1.2% of NDTL. This is absurd as during this time, seasonal tightness generally eases off. Following this tightness, a section of the market is calling for a Cash Reserve Ratio (CRR) cut on June 2. However, we don't think the RBI will cut CRR this time.
There are several reasons for this. First, CRR is currently low at 4% and the RBI might want to preserve this as ammunition in case Fed exit late in the year warrants liquidity support. Second, there are other routes such as open market operations, which can be used to bring liquidity back to normal mode. Third, CRR is only a marginal player. Estimates suggest that a 25bp CRR cut reduces cost of funds only by about 2bp. Finally, CRR cuts amount to a permanent liquidity injection.
The RBI may want to avoid making a permanent change at this point, when much is unknown about future liquidity.”
The note authored by Pranjul Bhandari, Chief India Economist, Prithviraj Srinivas, Economist and Stuti Saksena, Economics Associate says while India's 1Q2015 GDP (on the demand side) grew 7.5% y-o-y, showing an almost 100bp increase from the (downward revised) 6.6% growth of the previous quarter, the same message was not carried on the supply side of GDP (known as GVA at basic prices), which grew 6.1% y-o-y, 60 bps slower than the 6.8% y-o-y growth in the previous quarter.
The note states that “Finally, we don't foresee a CRR cut just yet. Liquidity conditions currently are tight with a system deficit of over Rs 1 trillion, at about 1.2% of NDTL. This is absurd as during this time, seasonal tightness generally eases off. Following this tightness, a section of the market is calling for a Cash Reserve Ratio (CRR) cut on June 2. However, we don't think the RBI will cut CRR this time.
There are several reasons for this. First, CRR is currently low at 4% and the RBI might want to preserve this as ammunition in case Fed exit late in the year warrants liquidity support. Second, there are other routes such as open market operations, which can be used to bring liquidity back to normal mode. Third, CRR is only a marginal player. Estimates suggest that a 25bp CRR cut reduces cost of funds only by about 2bp. Finally, CRR cuts amount to a permanent liquidity injection.
The RBI may want to avoid making a permanent change at this point, when much is unknown about future liquidity.”
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