Market to fall if RBI does not cut rates, says BNP Paribas  

March 26, 2012

Since economic growth is slow, there is a justification for a rate cut, hopes the market players

Moneylife Digital team

The Reserve Bank of India (RBI) annual monetary policy statement will be announced on 17 April 2012, and all eyes are on an expected rate cut, according to the Fixed Income Weekly Update from BNP Paribas Wealth Management. The CRR (cash reserve ratio) has been cut twice, bringing it down from 6% to 4.75%. According to BNP Paribas, in case there is no rate action on 17 April, market reaction would be adverse. The RBI may come up with a guidance in the statement on rate cuts going forward, but that would not help market sentiments as the direction is not the question now, the question is about the extent of rate cuts.

The other important forthcoming event is the announcement of the GoI (government of India) borrowing calendar for the first half of the coming fiscal. On the borrowing schedule, if the gross quantum in the first half is say 60% of the annual target, it would be approx 60% of Rs5,69,000 crore, which works out to more than Rs3,41,000 crore. This would exert upward pressure on G-Sec (government securities) yield levels, says the BNP Paribas.

The 10-year benchmark Gilt yield, after the up-tick on 16 March 2012 (Budget announcements), has been moving in a band. It is at 8.4% according to data from Bloomberg. Liquidity remained tight last week, being the week after advance tax outflows. Also, money market yields eased gradually over the week.

Further, the economy shows that there are concerns on inflation although inflation will be lower in March and April due to a favourable base effect. Fiscal consolidation has been attempted in the Union Budget, but still the target deficit for the year is 5.1% of GDP (gross domestic product) and there could be slippages from target, thus stoking inflation, feels BNP. Growth would be lower than optimal for a growing economy, and that remains the only factor for rate cuts, says BNP Paribas.

Data from Bloomberg shows that the monthly inflation figure for February 2012 was 6.95% against 6.55% in January 2012. The Index of Industrial Production (IIP) was 6.8% for January 2012 against 2.5% in December 2011.