7.4% IIP growth + 8.5% inflation = RBI pause :: BofA ML

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7.4% IIP growth + 8.5%
inflation = RBI pause
September IIP growth, October WPI inflation forecasts
IIP WPI
Previous: 5.6% 8.6%
BofAMLe: 7.4% 8.5%

Bottom line: Industrial, inflation cycles peaking off
􀂄 Incoming data should support our case for a RBI pause until March 11. We
expect September industrial growth to come in at 7.4% on Friday, although
data volatility is an obvious risk these days. In the net, we expect industrial
growth to slow to 8.2% in FY11 from 10.9% in April-August 10 .
October inflation should clock 8.5% on November 15, in line with September's
8.6% en route to 7% levels in December .


􀂄 This twin peak off should keep the RBI on hold on December 16 and end-
January. Nonetheless, the lagged impact of monetary tightening will likely
push up lending rates by 50bp in the busy industrial season.

Why it matters: RBI pause, 50bp lending rate hike
􀂄 We continue to expect a 50bp increase in lending rates in the October-March
busy season. In fact, SBI has already hiked prime lending rates by 25bp.
Loan growth, at 20%, after all, continues to trail deposit growth. Won't softer
industrial growth pull down loan demand? We remain comfortable with our
20% FY11 credit offtake forecast.

􀂄 Will banks raise lending rates after the RBI has paused? Yes, because its
100bp CRR hike has pulled down deposit growth to 15% from 20% levels.
Even if the RBI does step up liquidity to push up deposit growth (to 17.5%),
as we expect, banks should likely have the pricing power to push up lending
rates.
.
Details: M3, deposit data impacted by Coal India IPO
􀂄 Hasn't M3 growth already jumped to 17.1% (deposit growth 17.3%) on
October 22 from 15.2% on October 8? Sure, but this likely essentially reflects
a Rs870bn/US$19bn accretion to deposits due to the Coal India IPO
oversubscription money. Foreign investors were required to hold their entire
oversubscription in an Indian bank account in INR. Much of this will likely
unwind as foreign investors will withdraw their extra funds after allotment.

Next up in India: Slower primary articles inflation
􀂄 India: Primary inflation data (October 30), Thursday, 11 November 2010.

Next up in Asia: 19% October China loan growth
􀂄 China: Macro data (October), Tuesday, 9 November 2010.