No great surprises this time around

The Reserve Bank of India''s credit policy held no surprises this time round. The 50 basis points cut in CRR was expected, and we may see further cuts down the road.

The Reserve Bank of India governor said this will release up to Rs 50 bn, but this may be an overly optimistic target.

The market was hoping for, but not expecting, a cut in the bank rate. This has been left unchanged, but the Reserve Bank of India governor did leave the door open for a cut of up to 50 bp from the current 6.5 per cent rate. We think interest rates have bottomed out, and may actually tick back up over the year.

The government remains a large borrower in order to finance the deficit, so an additional rate cut will be difficult. Gross domestic product (GDP) growth of 6-6.5 per cent is probably a little on the optimistic side, especially given recent indicators. However, an inflation rate of 4 per cent looks achievable.

One interesting development is the RBI reducing the risk assigned to home loans. This will allow banks to increase their home loans without additional capital. Banks have been seeing a healthy increase in home loan demand, so this will help profitability. Overall, we’re in the middle of a weak economy struggling to recover.

Economists were hoping to see a rural-led recovery but it just hasn''t happened. Bright spots in the economy include the auto sector (two-wheelers and four-wheelers), banking sector, media, technology and select parts of the infrastructure sector.

We need additional areas of growth in order to have a broad economic activity.

The author is Managing Director, Solomon Smith Barney