Morning Bells (2 May 13)

Good Morning Friends,

busy with having look for fresh trades, I hope there's nothing new till RBI policy, so may be I will not post MB today. Lets see if I get time then will post it.

This will help for todays trade strategy -

RBI Rate Cut, will RBI cut the rates ? Answer is here -

In anticipation, the business press has already started beating the drums for a rate cut, and Business Standard even talks of a buzz about the RBI delivering a pleasant surprise with a 50 basis points cut (100 basis points is 1 percent).

However, the case against any rate cut continues to remain strong, till the evidence that inflation is coming under control gets stronger.

Right now, inflation is falling on the wholesale side, but not the consumer side. While the Wholesale Prices Index (WPI) is down to 5.9 percent (it may still be corrected upwards to above 6 percent later), the Consumer Price Index for March is still in double-digits at 10.4 percent.

What this means is that the slowdown has reduced business’ pricing power, but consumption demand is holding prices up. The more immediate cause of the drop in WPI is declining global commodity prices and the chances are that this decline could continue. But the domestic impact of this will be muted as long as the current diesel policy of raising prices steadily every month holds. Even today, the diesel price subsidy (or losses sustained by the oil companies) is Rs 6.42 a litre. It could take a year to neutralise this at the rate of 50 paise a month. In short, the fuel price uptick will continue all through till the next general elections in 2014.

The primary problem Subbarao faces is one of credibility. He fell flat on his face, not once but twice, by opting for easy money when it was unwarranted.

In 2010, he failed to raise interest rates on the presumption that growth needed a leg up rather than inflation a press down. At that time, the government’s post-Lehman stimulus packages were already beginning to create an inflationary spiral, boosting growth prematurely.

In 2012, based purely on Pranab Mukherjee 's promise that the fiscal deficit would be contained, Subbarao cut the repo rate (the rate at which banks borrow short-term funds from the RBI) by 50 basis points, when inflation was nowhere near trending down and fuel price increases were still to be passed on. (The current repo rate is 7.5 percent, and it has already been cut twice this year. Most analysts expect another 50-75 basis points cut in calender 2013.)

It is only now, after the fiscal correction has begun to take place under P Chidambaram, that WPI seems on the right trajectory. But this presents Subbarao with a different problem: is he following the right inflation index to really assume that inflation is headed south in a sustainable basis?