Dec-2011 inflation at 7.5% was the lowest inflation in two years and reflected a rapid deceleration from ~10% during Sep-Oct 2011
While this gives background for RBI to cut rates, we believe it will choose otherwise, for a variety of reasons: (1) Core inflation stays above RBI’s comfort level, (2) Latest IIP print of 5.9% may alter the views of adverse growth-inflation balance, and (3) From a communication standpoint too, a lagged response to inflation may serve to convey RBI’s resolve to control inflation while growth revival is deferred
However, we expect RBI to effect a 25bp cut in CRR along with continued OMO (INR614b done already). This is because LAF balance is twice the comfort level of RBI. Government’s recourse to WMA at INR490b and continued borrowing in the busy fourth quarter will pressures on yields. In the absence of a CRR cut, expect 10-year GSec yields to harden back to 8.5%.
While this gives background for RBI to cut rates, we believe it will choose otherwise, for a variety of reasons: (1) Core inflation stays above RBI’s comfort level, (2) Latest IIP print of 5.9% may alter the views of adverse growth-inflation balance, and (3) From a communication standpoint too, a lagged response to inflation may serve to convey RBI’s resolve to control inflation while growth revival is deferred
However, we expect RBI to effect a 25bp cut in CRR along with continued OMO (INR614b done already). This is because LAF balance is twice the comfort level of RBI. Government’s recourse to WMA at INR490b and continued borrowing in the busy fourth quarter will pressures on yields. In the absence of a CRR cut, expect 10-year GSec yields to harden back to 8.5%.
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