Is another rate cut on the cards?

After the two abortive Treasury bill auctions in a row (held during the past month) where investors not only shunned sovereign papers but also demanded higher yields, what does the success of the recent Treasury bill auction suggest? Market attributes strong participation level, along with lower bids placed, in the current treasury bill auction to an improved liquidity level, but, in essence, it heralds an air of optimism. In consideration of slow down in inflationary pressures, which eased down, year on year, to 9.75 percent in December 2011 as opposed to average monthly inflation of around 10.89 percent ( year on year) during the first half of FY12, pressure on interest rate have been assuaged. Notwithstanding the latest data that revealed a slight swelling in SPI data during the previous three weeks (data till 5th January 2012), its impact would be minimal on the average inflation trend line for the rest of the fiscal year. Current account balance also improved by a whisker, since the average monthly current account deficit stood at around $382 million in October and November, down from average monthly deficit of $446 million during 1QFY12. The balance of payment for December 2011 is not available yet, but a slight improvement in foreign exchange reserves in December 2011, after a continuous decline in reserves balance since the start of FY12, points to the progress in balance of payment position in December 2011. On the flipside, a real pressing issue is worsening in value of rupee, which has depreciated drastically during the past two months and has been continuously falling since the start of FY12. It is definitely an eye-brow raising element for policy makers. The current account balance has been showing strain on currency. But, the markets experience with policy makers in the past few monetary policies suggests, if all other economic indicators stay in comfort zone, the overall current deficit and rupee position would not act as a stumbling block in the path for a rate cut. In short, optimistic tone in the market, and given that the policy makers intend to keep real rate of rerun close to zero, foreshadows a case for 50 to 100 bps point cut in monetary policy down the line.