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Moody's sets the mood on Street; will RBI give it a boost?

By ECONOMICTIMES.COM | 16 Jan, 2014, 01.26PM IST
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Inflation looks like being reined in, the World Bank is projecting an above 6 per cent growth for India in the coming financial year and top global ratings agency Moody's says a downgrade for India is not on the cards. All the signs are in favour of the Reserve Bank not going for a rate hike at its January 28 policy meet. Experts are also saying so, with some suggesting that in fact a rate cut could be possible if not a status quo. "It depends on whether Raghuram Rajan ( RBI chief) takes a purely purest technical view of inflation, in which case it makes sense for him to wait for the trend, wait for a few more data points, or whether as in the past in December there was a suspicion that may be he was guided by political economy considerations; and could perhaps cut interest rates," says Mythili Bhusnurmath, consulting editor, ET. Suprising the Street on the positive, December WPI inflation came in at 6.16%. The figure was released on Wednesday, and is much below the consensus of 7%; and at a five-month low. Easing inflation comes as a big positive for the Street ahead of the Reserve Bank's policy meet on January 28. The little apprehensions over the RBI going for a 25 bps rate at the policy meet would now be ebbing. In fact, December CPI inflation, released on Monday, also came in at 9.87% as against 11.24% for the month of November. Last year, when the RBI for a series of policy rate hikes, the premise was the high inflation figure; but then much cannot be read from the current inflation numbers because Raghuram had at December policy meet said that no single-point data would determine the central bank's policy moves. If we look at the industrial production data, it contracted for a second straight month in November. The Index of Industrial Production (IIP) fell 2.1% in November, marking the second consecutive month of contraction, data released by the statistics office on Friday showed. The consensus was for a modest 1% rise in November. A 21.5% drop in the production of consumer non-durables just added to the worries on the consumer story. "The inflation numbers, overall economy suggest that the RBI has some room to sort of pause a little bit on tightening measures, though core inflation is still picking up," Mark Konyn, CEO, Cathay Conning Asset Management, told ET Now. "Yes, from the purely near-term, short-term perspective inflation figure is kind of comforting for investors, specifically because there was a part of the market which was worried about a much more aggressive stance by RBI, specifically given the data points we have seen over the last couple of months. So yes, it will provide a respite; but again this is more from a short-term perspective," says Gautam Chhaochharia, Head-India Research, UBS. Other experts however see the RBI hiking policy rates by 25 basis points at the January 28 policy meet.
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All the signs are in favour of the Reserve Bank not going for a rate hike at its January 28 policy meet. Experts are also saying so, with some suggesting that in fact a rate cut could be possible if not a status quo.

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Moody's sets the mood on Street; will RBI give it a boost? - The Econ...

http://economictimes.indiatimes.com/news/economy/policy/moodys-se...

"Our economists are forecasting a 25 bps increase in the interest rates in the coming policy and the sole basis for that forecast is the fact that the core inflation number is still fairly high," Neeraj Gambhir, MD & Head, Fixed Income India, Nomura Capital India Pvt Ltd, told ET Now yesterday. "We feel that the management of inflationary expectations would probably continue for some more time. We need to wait a little bit more to see what happens to the global commodity prices, as we head into the next monetary policy," Gambhir said. In a sentimental boost, Moody's today was quoted by Bloomberg as saying that a ratings downgrade for India is not on the cards. This comes as a positive for the Indian economy as earlier this month Fitch had said that India may face a credit ratings downgrade in the next 12-24 months. "Our affirmation of the 'BBB-' rating in June reflected India's diversified economy and high domestic savings... Policy slippage and/or mounting evidence of a structural decline in the trend growth rate, such as protracted relatively weak economic data, could cause the ratings to be downgraded," Fitch had said. Standard & Poor's had also warned that India faces a one-in-three chance of downgrade in its sovereign rating to 'junk' over the next 24 months. In another sentiment-building event, the World Bank yesterday said that India's economy would grow over 6 per cent in 2014-15 and 7.1 per cent by 2016-17. The bank cited global demand recovery and an increase in domestic investment as the reasons.

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