Top 3 concerns of the central bank of India

It looks to push the shortfall to 4.8% of GDP.

According to DBS, the Reserve Bank of India (RBI) is scheduled to conduct the mid-quarter policy review on 19 March, Tuesday. Despite the firm January industrial production numbers and modest uptick in the February WPI, the central bank is likely to assume a growth-supportive stance and cut the repurchase rate (repo) by 25bps to 7.50%. 

This will take the reverse repurchase rate to 6.50%, by virtue of the fixed corridor. Third quarter FY12/13 GDP growth surprised to the downside at 4.5% YoY (3.1% QoQ saar) on broad slowdown in growth engines.

While the initial slowdown in the growth momentum was a product of easing investment and industrial growth, the growth numbers in the last two quarters have shown additional strain on consumption spending and services sector.

Here's more from DBS:

Sticky inflation, worries over current account deterioration and need to consolidate public finances have been amongst the foremost concerns for the central bank.

While the current account deterioration cannot be materially addressed in the near-term, there is notable progress on the inflation and fiscal front.

The government met the FY12/13 fiscal deficit target and aims to lower the shortfall to 4.8% of GDP in the next fiscal year.

Also, the RBI referred to the recent budget as ‘measured and responsible’, warming up to blueprint laid out for the next fiscal year.

Implementation risks, however, still remain. Next, the WPI inflation print has been falling since touching a peak at 8.1% in late-3Q12.

Much of the spurt in the February headline WPI was on account of the government’s decision to raise prices of subsidised fuel products, excluding which the reading would have been closer to 6.3-6.5%.

Therefore, even though all the boxes are not checked, we expect the central bank to undertake a follow-up 25bps cut on Tuesday, in a bid to support sluggish growth.

We are however sceptical on the effectiveness of the transmission to the retail lending rates, after some domestic banks raised deposit rates in recent weeks.