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India Macro Watch
RBI: Hey, back in May!
25bp hike in RBI policy rates
Reverse repo Repo rates
Actual: 5.50% 6.50%
Previous: 5.25% 6.25%
Consensus: 5.50% 6.50%
BofAML: 5.50% 6.50%
Bottom line: RBI on the curve; next 25bp hike on May 3
„ We continue to expect the RBI to hike policy rates 25bp in its May 3 policy. It,
of course, hiked 25bp today as we and consensus predicted. It also naturally
hiked the March 2011 inflation forecast to 7% (7.1% BofAMLe) from 5.5%. Is
it behind the curve? Not really, in our view. In fact, we would rather that
2010’s 100bp CRR and 200bp rate hikes got some time to have effect.
Indeed, it is unfortunate that the ongoing spike in vegetable prices robbed the
RBI of an opportunity to pause longer - as its cautious monetary policy stance
hints. In a way, Gov Subbarao wasted a precious bullet today when inflation
is peaking (ok, at elevated levels), industrial growth slowing, the reverse repo
rate (5.5%) at the 5.5% medium-term inflation rate and lending rates rising
(Charts 1-2). That said, there is no doubt that the RBI will hike rates 75bp
more in 2011, especially with growth set to pressure core inflation in mid-11.
Why it matters: …75bp hike in lending rates in 2HFY12
„ We continue to expect money market liquidity to improve by April. Table 2
shows that recent Rs670bn RBI OMO should cover up money market deficit
by March. Extension of the 1% SLR cut for LAF repos till April 8 should help.
„ The extension of liquidity measures announced last year combined with
concerns over inflation caused the OIS curve to steepen on the back of the
rate decision. We expect further steepening of the OIS curve as the RBI
continues to hike in 25bp clips.
„ We continue to expect lending rates to go up 75bp in 2HFY12 atop 100bp this
fiscal on RBI action, 20% loan demand and a high fiscal deficit. The 10y
should rule around a mid-cycle 8% with RBI OMO deflecting some pressure.
Details: What Gov Subbarao wants to do
„ Contain the spill-over from rise in food and fuel prices to generalized inflation.
„ Rein in rising inflationary expectations, which may be aggravated by the
structural and transitory nature of food price increases.
„ Be moderate enough not to disrupt growth.
„ Continue to provide comfort to banks in their liquidity … operations.
Appendix I: India's monetary policy
Multiple objectives
The RBI pursues multiple objectives as the central bank, manager of public debt,
supervisor of banks and regulator of money, gilts and fx markets. As the relative
emphasis is contextual, the RBI publishes both inflation and growth "projections".
Financial stability is also a key policy concern. Although the RBI officially only
contains currency volatility, the exchange rate regime is really a managed float.
Multiple indicators
Monetary policy is formulated on the basis of information gleaned from a set of
macroeconomic indicators: broad money, interest rates, equity prices, currency,
credit extended by banks and financial institutions, fiscal position, trade, capital
flows, inflation rate, exchange rate, refinancing and transactions in foreign
exchange juxtaposed with output trends.
Multiple transmission channels
Multiple monetary policy transmission channels require the RBI to operate
through both the quantum as well as the price of money. Monetary policy
impulses travel to the real economy by affecting both credit available and
increasingly, interest rates. The RBI also informally targets the real effective
exchange rate although the official position is really managing volatility.
Multiple instruments
The simultaneous co-existence of multiple channels of monetary policy
transmission naturally necessitates an array of monetary policy - quantum and
rate - instruments. Daily fixed rate repo and reverse repo auctions under the
Liquidity Adjustment Facility (LAF) serve as the primary instrument of monetary
policy. Changes in the LAF repo and reverse repo rates (and the Bank Rate)
signal the RBI's interest rate stance and alter the price of primary liquidity.
Liquidity operations usually try to encase call rates in a corridor defined by the
LAF reverse repo and repo rates.
Second, the management of liquidity by the LAF is supplemented by changes in
the cash reserve ratio (CRR) (and standing facilities).
The RBI also conducts outright open market operations in government paper.
This is now supplemented by periodic cancellation of gilt auctions.
The RBI uses the Market Stabilization Scheme for the monetary management of
capital flows. Rupee liquidity generated by RBI fx intervention to cap rupee
appreciation is mopped up by the government in gilt auctions and the proceeds
parked with the RBI.
The RBI has also been buying oil bonds from oil marketing companies to release
fx for oil imports under its Special Monetary Operations (SMO).
Finally, the RBI typically follows a counter-cyclical policy on supervisory
standards.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
India Macro Watch
RBI: Hey, back in May!
25bp hike in RBI policy rates
Reverse repo Repo rates
Actual: 5.50% 6.50%
Previous: 5.25% 6.25%
Consensus: 5.50% 6.50%
BofAML: 5.50% 6.50%
Bottom line: RBI on the curve; next 25bp hike on May 3
„ We continue to expect the RBI to hike policy rates 25bp in its May 3 policy. It,
of course, hiked 25bp today as we and consensus predicted. It also naturally
hiked the March 2011 inflation forecast to 7% (7.1% BofAMLe) from 5.5%. Is
it behind the curve? Not really, in our view. In fact, we would rather that
2010’s 100bp CRR and 200bp rate hikes got some time to have effect.
Indeed, it is unfortunate that the ongoing spike in vegetable prices robbed the
RBI of an opportunity to pause longer - as its cautious monetary policy stance
hints. In a way, Gov Subbarao wasted a precious bullet today when inflation
is peaking (ok, at elevated levels), industrial growth slowing, the reverse repo
rate (5.5%) at the 5.5% medium-term inflation rate and lending rates rising
(Charts 1-2). That said, there is no doubt that the RBI will hike rates 75bp
more in 2011, especially with growth set to pressure core inflation in mid-11.
Why it matters: …75bp hike in lending rates in 2HFY12
„ We continue to expect money market liquidity to improve by April. Table 2
shows that recent Rs670bn RBI OMO should cover up money market deficit
by March. Extension of the 1% SLR cut for LAF repos till April 8 should help.
„ The extension of liquidity measures announced last year combined with
concerns over inflation caused the OIS curve to steepen on the back of the
rate decision. We expect further steepening of the OIS curve as the RBI
continues to hike in 25bp clips.
„ We continue to expect lending rates to go up 75bp in 2HFY12 atop 100bp this
fiscal on RBI action, 20% loan demand and a high fiscal deficit. The 10y
should rule around a mid-cycle 8% with RBI OMO deflecting some pressure.
Details: What Gov Subbarao wants to do
„ Contain the spill-over from rise in food and fuel prices to generalized inflation.
„ Rein in rising inflationary expectations, which may be aggravated by the
structural and transitory nature of food price increases.
„ Be moderate enough not to disrupt growth.
„ Continue to provide comfort to banks in their liquidity … operations.
Appendix I: India's monetary policy
Multiple objectives
The RBI pursues multiple objectives as the central bank, manager of public debt,
supervisor of banks and regulator of money, gilts and fx markets. As the relative
emphasis is contextual, the RBI publishes both inflation and growth "projections".
Financial stability is also a key policy concern. Although the RBI officially only
contains currency volatility, the exchange rate regime is really a managed float.
Multiple indicators
Monetary policy is formulated on the basis of information gleaned from a set of
macroeconomic indicators: broad money, interest rates, equity prices, currency,
credit extended by banks and financial institutions, fiscal position, trade, capital
flows, inflation rate, exchange rate, refinancing and transactions in foreign
exchange juxtaposed with output trends.
Multiple transmission channels
Multiple monetary policy transmission channels require the RBI to operate
through both the quantum as well as the price of money. Monetary policy
impulses travel to the real economy by affecting both credit available and
increasingly, interest rates. The RBI also informally targets the real effective
exchange rate although the official position is really managing volatility.
Multiple instruments
The simultaneous co-existence of multiple channels of monetary policy
transmission naturally necessitates an array of monetary policy - quantum and
rate - instruments. Daily fixed rate repo and reverse repo auctions under the
Liquidity Adjustment Facility (LAF) serve as the primary instrument of monetary
policy. Changes in the LAF repo and reverse repo rates (and the Bank Rate)
signal the RBI's interest rate stance and alter the price of primary liquidity.
Liquidity operations usually try to encase call rates in a corridor defined by the
LAF reverse repo and repo rates.
Second, the management of liquidity by the LAF is supplemented by changes in
the cash reserve ratio (CRR) (and standing facilities).
The RBI also conducts outright open market operations in government paper.
This is now supplemented by periodic cancellation of gilt auctions.
The RBI uses the Market Stabilization Scheme for the monetary management of
capital flows. Rupee liquidity generated by RBI fx intervention to cap rupee
appreciation is mopped up by the government in gilt auctions and the proceeds
parked with the RBI.
The RBI has also been buying oil bonds from oil marketing companies to release
fx for oil imports under its Special Monetary Operations (SMO).
Finally, the RBI typically follows a counter-cyclical policy on supervisory
standards.
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