<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[<p>As expected the Reserve Bank of India (RBI) did not cut rates. It had no reason to. A 75 basis point (bps) cut in the cash reserve ratio (CRR) to 4.75 per cent kicked in only five days ago (effective March 10th). And there was only an outside chance of a fresh round of cuts ahead of the Union Budget for 2012-13 on Friday.<br><br>The central bank had already indicated in its last meeting that policy rate action going ahead would be contingent on the extent of fiscal consolidation the government would target in 2012-13. It would become clear only tomorrow and a repo rate cut right now could, therefore, have been construed as premature.<br><br><strong>Wait & Watch</strong><br>The key takeaway from Thursday's review is inflation appears to have come back on top of the central bank's radar. Year-on-year (YoY) headline inflation which held above 9 per cent during April-November 2011 has been on a see-saw since. It dropped to 7.7 per cent in December, and lower to 6.6 per cent in January 2012, only to head northwards to 7 per cent in February. The worry for RBI is "upside risks to inflation have increased from the recent surge in crude oil prices, fiscal slippage and rupee depreciation".<br><br>Then you have growth. GDP growth YoY decelerated to 6.1 per cent in the third quarter of 2011-12 from 6.9 per cent in the second quarter. Given the growth-inflation dynamics, the RBI is clear the next rate move is lower. But it has categorically said notwithstanding the deceleration in growth, "inflation risks remain, which will influence both the timing and magnitude of future rate actions".<br><br>"Today's statement does appear to be more hawkish, with the focus more firmly back on inflation. Unlike the previous policy where the RBI had said the rate decision would be contingent on fiscal consolidation and steps to incentivise investment, this time it has broadened its emphasis to other variables fuelling inflation", explains Rohini Malkani, Chief Economist at Citigroup (India).<br><br>"It quite evident RBI would partly base its decision to cut policy rat, on the emerging core inflation figures and developments on oil and other commodities front. It appears that RBI is comfortable with current GDP growth rate of 6 per cent plus and is not in a hurry to boost growth. Due to weak domestic demand and higher base effect, the core inflation is expected to moderate further in 2012-13. This would provide room to RBI to cut rates and boost growth. We expects a 150 bps cut in repo rate in going ahead", says Shyam Srinivasan, MD & CEO of Federal Bank.<br><br><strong>Economic Survey, Railway Budget</strong><br>The new variable is the Economic Survey which has slightly queered the pitch as it sees a strong GDP growth of 7.60 per cent for the coming fiscal. "The Budget will be keenly watched to ascertain the extent of fiscal deficit and the gross borrowing needs. Any large deficit and consequent borrowing program could affect liquidity in the market and rates", notes Krishnamoorthy Harihar, Treasurer, FirstRand Bank who adds "good revenue projections from disinvestment as well as telecom auctions, which could lead to a manageable fiscal deficit", would be a key.<br><br>The RBI would watch inflation numbers in the coming months as the base year effect wears off, and the recent railway freight hikes and possible diesel and petrol price hikes find their way into inflation numbers. "So while hopes rest on a lower inflation number in the coming weeks, oil price trajectory in international markets, as well government moves on pass through of crude costs could influence inflation levels and consequent rate moves", explains Harihar.<br><br>If the government does expect to target a lower fiscal deficit next fiscal, is a repo rate cut in April still likely? While upside risks to inflation remain, especially from structural factors (such as fiscal slippage and demand-supply imbalances in key food items) and firm global commodity prices, these are likely to curtail the degree of monetary easing going ahead. "They are unlikely to delay or derail it. We, therefore, retain our expectation that the first repo rate cut (25 bps) will likely come in the April annual review paving the way for 50-75 bps of additional repo rate cuts for the remainder of the year and taking the total repo rate cut tally for the year to a relatively modest 75-100 bps", Abheek Barua, Chief Economist at HDFC Bank which expect a deficit of 4.9 per cent GDP in 2012-13 against 5.7 per cent in 2011-12),</p>