The RBI left all policy rates unchanged as part of its mid-quarter monetary policy review yesterday. The repo rate remains unchanged at 8.5% whilst the marginal standing facility rate and reverse-repo rate stand at 9.5% and 7.5% respectively whilst the repo rate remains unchanged at 4.75%.
The shape of the fiscal deficit is likely to be a critical input into monetary policy decision making in FY13 given that FY12 saw a complete breakdown in the synchronisation between monetary and fiscal policy (see exhibit 1 below for details). Therefore, besides the trajectory of inflation over the next few months, clarity on the quantum of the fiscal deficit will help the RBI take a stance regarding the quantum of repo rate cuts.Given that (1) only incremental fiscal consolidation is likely to be delivered in FY13 (see our email dated March 15, 2012 for details) and (2) given that we expect headline inflation to record improvements over 1HFY13 as the lagged impact of weak GDP growth plays out on core inflation (we expect headline inflation to average at 5.4% YoY in 2QFY12 - see our email dated February 27, 2012 for details), we expect limited repo rate cuts to be administered over FY13. Our modelling exercise suggests that the repo rate is likely to be cut by a maximum of 100bps over
FY13. We expect the first of these rate cuts to administered at the next monetary policy review on April 17, 2012.
