Mkt guesses 50-50 chance of rate cut

The credit policy is due tomorrow, while the markets have never been quite successful in outguessing the Reserve Bank Governor, a poll conducted by CNBC-TV18 indicates that the market is split right down in the middle in terms of guessing the governor's rate action. P Chidambaram the Finance Minister, said, "The Governor's task is not easy, he has to not only control inflation, but also maintain growth." On January 29, these are the factors that will dominate RBI Governor, as he presents his monetary policy review. The Governor will also have to seriously consider the unexpected three quarter percentage point rate cut by the Federal Reserve and prepare for a much worse global economic outlook. So what is he expected to announce on January 29?
In a poll conducted by CNBC TV18, 56% of the bankers polled do not expect Reddy to cut the key repo-rate.
An even bigger majority of 76% of bankers polled believe that Reddy will not cut the reverse repo rate and they feel that despite higher interest rates, the economy is clocking a growth of over 8.5% and inflation is within RBI's comfort zone of 3-3.5% and so the Governor is likely to maintain a status quo. Hence, 99% of the market men feel he will not tinker with the CRR either.
As at the moment he has other instruments like the MSS bonds to control liquidity in the banking system. But this doesn't mean the market is reconciled to a no-change policy. There are 44% bankers and market participants out there who expect the Governor to cut the repo rate. They also point out that given the widening interest rate difference between US and India, the lack of a rate cut will only bring more dollars in and compound the RBI's and the economy's problems. They also argue that with industrial production slowing from 12% to 5.3%, a rate cut is needed to keep growth going at 9%.
Uday Kotak, said, "Consumption demand is slowing down a bit, investment demand is picking up and you want to make sure that it remains strong. More than anything else, the quarter percentage drop, if the central bank does it, is a very important signal. The signalling effect that they are responsive to factual changes in the market, at a time when inflation is not really leering its head in the Indian context, and a gloomy global situation."
While the poll has indicated that a majority expect a no change policy, bond prices indicate otherwise. The fall in bond yields, especially since Ben Bernanke cut rates last week, indicates that the market is factoring in a good chance of a rate cut. The Governor himself has gone on record to say that uncertain global economic factors will play a large role when he drafts his policy. Governor Reddy has a record of surprising markets. Which is why probably, while an overwhelming majority in the market is hoping for a cut, only a minority is expecting a cut.