The RBI may cut the repo rate by 25 basis points as economic recovery continues to remain fragile, say economists.

With factory output growth, as measured by the index of industrial production (IIP), in the April 2011-February 2012 period slowing to 3.5 per cent, against 8.1 per cent in the year-ago period, economists feel that growth concerns have come to the fore.

The central bank is scheduled to announce its Annual Monetary Policy for 2012-13 on April 17. It has indicated in the previous three policies that the rate cycle has peaked and future actions will be towards lowering the rates.

INVESTMENT ACTIVITY

According to Ms Upasana Bharadwaj, Economist, ING Vysya Bank, weak economic growth momentum clearly warrants an initiative by the policymakers to propel investment activity. Hence, RBI is expected to cut the repo rate by 25 bps in the forthcoming meeting.

To tide over temporary liquidity mismatches, banks borrow funds from the RBI at the repo rate. The repo rate is currently at 8.50 per cent. (One basis point is equal to one-hundredth of a percentage point. or 0.01 per cent.)

SHIFT IN FOCUS

Mr Sudhakar Shanbhag, Chief Investment Officer, Kotak Mahindra Old Mutual Life Insurance, said the February IIP at 4.1 per cent was far below the market consensus of about 6.7 per cent.

Also, the rate and degree of revision of previous month's data (to 1.1 per cent from 6.8 per cent) is increasingly making reliance on the data a challenge. “From the growth-inflation perspective, it is increasingly getting clear that focus has to shift to growth and hence the market expectation of rate cut from the RBI has increased post this data release…..

“Global dynamics especially oil prices are critical and RBI would also get to see the inflation release on April 16, 2012 before it takes a stand on rate cuts,” he said.

Primary Dealership firm STCI, in a report, observed that the RBI may cut policy rates mainly to provide some boost to the growth sentiment.

“We also expect the RBI to ease the cash reserve ratio by 50 basis points as liquidity is expected to tighten going ahead,” said Economists Mr Amol Agrawal and Ms Neetika Shridhar in the report.

Mr Chaitanya Pande, Head-Fixed Income, ICICI Prudential Asset Management, said the market is suffering from number fatigue, with the fiscal deficit and government borrowing overshooting the Budgeted target in 2011-12 and the IIP numbers getting revised lower.

He said the RBI may not act on the repo rate unless there is clear indication that the inflation is heading lower. (The Hindu)