The Reserve Bank of India (RBI) and the Indian Ministry of Finance seem to be at loggerhead. The government is concerned with the slowing growth and is trying to implement growth policies and dropping strong hints to RBI to provide some help.

In its mid-year economic analysis presented in Parliament on Monday, the finance ministry said it expected GDP growth of between 5.7 per cent and 5.9 per cent for the year, which is lower than the 7.6 per cent budgeted but higher than 5.4 per cent achieved in the first half.

This, the government said, meant the growth rate for the second half would be “close to around 6 per cent”, as it made an undisguised pitch to RBI to oblige by cutting rates. “To achieve this, both fiscal and monetary policies, however, would need to be supportive to sustain investor confidence,” the review said.

But, the Reserve Bank of India is displaying its independence and is maintaining that the inflation risks remain. In its December meeting, RBI did not cut the key rates despite various pleas by the industry and government to lower them to spur growth.

The Reserve Bank of India (RBI) on Tuesday kept key policy rates including the cash reserve ratio (CRR) unchanged. While the repo rate was maintained at 8%, CRR was also maintained at status quo of 4.25%

D Subbarao (RBI Chairman) maintained that risks to inflation remain and emphasised the need to shift increasingly towards growth. The RBI hinted at a shift in stance towards pro-growth measures and has lauded the government’s policy initiatives.

Though the industry was clamoring for and expecting a rate, many experts and economists were not. Goldman Sachs was expecting a 25 bps cut. But, some like HDFC are expecting a 50 bps cut by March.

India is facing duel problems for some time. Majority of developed nations are facing threats of deflation and lack of growth. They are also facing high sovereign debt and increasing budget deficit. So they have limited options. Their central banks are cutting rates to spur growth and keep deflation risks at bay without much getting much help from fiscal policies. Many developing nations are also facing slowing growth mostly because of the impact of the lack of growth in the developed economies. Unlike, advanced economies, developing nations are not facing deflation risks and the the inflation is moderate. So they have more options to implement growth oriented monetary and fiscal policies.

India, on the other hand is facing the duel problem of high inflation and slowing growth. Her expected growth of 5.7-to-6 per cent is impressive compared to that of developed nations but not for an emerging economy like India. The wholesale price index (WPI), India’s main inflation gauge is at 7.24 per cent, but it is at a 10 months low. The consumer price index remains at 9.9 per cent. Again, by developed nations’ standard, the inflation is high but based upon India’s situation, inflation is cooling down.

So it is natural that the government and the industry would like to see more growth oriented policies to be implemented. The government is running budget deficits but plans to limit it to 3 per cent of the GDP. This is not very good nut it gives some leeway to implement growth policies. But, the government also needs help from RBI for easy monetary policy. Hence its pleas for rate cuts.

D. Subbarao, the RBI Chairman is a cautious central banker who is more concerned about the threats of inflation than the lack of growth concerns. He is playing safe and keeping rates constant. But, then RBI has a history of doing such things and reacting later than what the industry expects. Here is the main Indian market index performance during RBI’s rate-cut and rate-hike stints.

From October 2004 to July 2008, RBI continuously raised rates in 25 bps increment – reaching a high of 9.00 percent by July 29, 2008. During this time the $SENSEX steadily rose before stalling at the beginning of 2008. At that time the global economies stumbled and SENSEX followed suit but RBI reacted ten months later in October.

Federal Reserve started to cut rate in the fall of 2007 but RBI started to cut rates only from October 29, 2008. It steadily cut rates till April 2009 before stopping at 4.75 per cent. Then it stood pat for next 11 months. After making a double bottom in March 2009, $SENSEX started to rise. It briefly traded in a range in early 2010 before testing the all time high in the later half of 2010.

Beginning March 2010, RBI started to raise rates to slow down the supper hot Indian economy. For next 19 months it implemented 25 bps increment – reaching a high of 8.50 per cent by October 2011. During this time $SENSEX tested the all time high and made a double top and them fell for most of 2011. From the high made in November 2010, $SENSEX fell by more that 21.9%.

During this time inflation was rising and economy was gradually slowing down. By late 2011, $SENSEX was in bear market territory, inflation was plateaued stubbornly at a high level and economy was stalled. So it was natural that the industry was looking for a respite. Experts floated various scenarios in which the RBI could lower rates. $SENSEX turned around and became one of the best equity market index of 2012. So fare it is up by over 24% year-to-date.

After making a low of 15135 in late 2011, $SENSEX rose to a high of 18523 by February 2012. It then declined to 15748 by June 2012. Since then the index is steadily rising. In the process it has formed an un-even head-&-shoulders pattern. The pattern has come after a short decline. $SENSEX declined from a high of 21080 made in early November 2010 to the low made in December 2011. Nevertheless, the pattern is visible and valid. $SENSEX broke above the February 2012 neckline high of 18523 in September and has stayed above the broke-out level.

Presently it is testing the breakout level but if the pattern holds then the potential target is near 21000, which is near the all time high.

NIFTY-fifty, the index of major Indian companies (DJIA of India), is also showing a similar H-&-S pattern.

EPI – Wisdomtree India Earnings Fund – could be used as a proxy for $SENSEX. EPI followed the index well during 2009 to 2010 rise but since 2011, it has been lagging. EPI made a double bottom in May 2012 – making a low earlier than $SENSEX but falling lower. Since this it has not gone above 2012 high whereas $SENSEX made new 2012 high. IF EPI reasserts its linkage with the country’s main index then it has much more room to go up. On the other hand, the bigger companies in the ETF markedly underperform then national index then the breakout in $SENSEX may not last.