Thursday, December 15, 2011

Macros point to a Rate/ CRR Cut – Will the RBI be bold enough?

The consensus expectation seems to be that it is too early for RBI to cut CRR, however if we go by how the RBI reacted during the 2008 crisis, there does seem a fair chance that CRR might be cut. Or at the very least some kind of liquidity infusion measure might be announced as a change of stance from hawkish to dovish.

Compared to the macro scenario in Oct 2008, when the first rate cuts happened during that period, this time the scenario is much worse. Comparing the pre rate cut period of Sept-Oct 2008 to current macro conditions, GDP is worse now, IIP is worse, Inflation is better and non food credit is worse.

Here are are the numbers :-

1. RBI cut the Repo rate by 100 BPS in Oct 2008, just three months after the last hike during July 2008. During the same month, along with Repo rate cut, it also cut the CRR by 300 BPS,  just two months after it had hiked CRR to a high of 9% . It’s just two months now since RBI did the last repo rate hike, and not really too early to cut CRR.

2. When it cut the CRR and Repo rate in Oct 2008, GDP had already fallen from a high of around 10% to 7.9%, while this time around the GDP is now at 6.9%

3. IIP had come down to 5% level by the time the first rate cut/ CRR cut were carried out, while the IIP now is at a negative 5% levels.

4. Monthly WPI inflation had shown three successive months of decline from a high of 11.15% in July 2008 to 10.66% in October 2008 and the world food price inflation from FAO had come down from a high of 57% in Feb 2008 levels to negative 3% by Oct 2008.  RBI did not wait for the monthly WPI to fall to 7% levels the last time also. This time the WPI has shown two successive months of decline from a high of 10% in Sep 2011 to 9.11% for Nov 2011 and the Nov inflation of 9.11% is way lower than the 10.6% when RBI cut repo rates and CRR in Oct 2008. As for the FAO index, its down to 1% in Nov 2011, from a high of 37% in March 2011

5. During the first rate cuts in October 2008, the non food credit growth yoy was around 25% levels, while this time around it already in the 18% range.

RBI was bold in raising the rates during the last one year, during which time the repo rates almost doubled from 4.75% to 8.5% .

The question is will it bold enough to start infusing liquidity now.