Contrary to the market expectation for a rate cut in mid-quarter monetary review, RBI refrained from changing any of the policy rates. That means that repo rate remains at 8 per cent and the cash reserve ratio (CRR) for scheduled banks remains at 4.75 per cent.

What would have motivated RBI to do so when GDP growth in last quarter (Q4 FY12) was reported at 5.3 per cent and the IIP in April 2012 printed only 0.1 per cent suggesting a significane drop in industrial activity?

Reasonably high inflation: The WPI and CPI were last reported at 7.55 per cent and 10.36 per cent, which are still on the higher side without factoring in lowering growth will automatically bring down inflation over a period of time, but RBI seems to remain conservative on this side also at a point, when the situation of monsoon so far is not very clear.

Rupee depreciation: The rupee has recently depreciated significantly against dollar impacting India’s current account balance, which anyway is strained because of India being a net importer. Any lowering of interest rate at this juncture would have resulted in further depreciation of the rupee which may result in putting further pressure on the already stretched fiscal situation.

The RBI had frontloaded the policy rate reduction in April with a cut of 50bps. This decision was based on the premise of fiscal consolidation critical for inflation management would get under way, along with other supply-side initiatives.

This all means that the market has to wait for some more time to see monetary policy push for the slowing economy. The market may be seen moving the range for the time being, after giving away some of the last weeks’ gains as an after-effect of the policy statement.

The market may also get some comfort from the fact the Greek election result has confirmed existence of euro in the preset form for some time now.

The money market may also give away the last week’s gain, which came on hope of rate cut by RBI. One can see money market curve moving up by 10 to 20 basis points initially. Anything beyond that shall be contained because RBI has committed to continue to conduct open market operation (OMO) as and when required.

We continue to maintain that the investing in short-term income fund at this point is better on risk adjusted return basis.