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INDIA MONETARY POLICY -
RBI hikes rates, more to come
As expected, the RBI hiked policy rates by 25bps,
and continued to tighten policy. A small minority was
expecting a bigger 50bps increase, but the RBI
preferred – justifiably, in our view – to stay with a
25bps move. Following the latest hike, the repo and
the reverse repo rates are at 6.50% and 5.50%,
respectively, and the RBI has increased policy rates
by 325bps since the start of CY2010.
Not surprisingly, the tone of the policy statement was
hawkish. In order to ease the ongoing liquidity deficit,
the RBI extended the temporary liquidity support of
up to 1% of net demand and time liabilities to 8 April.
Contrary to expectations, the RBI did not succumb to
the pressure for cutting the cash reserve ratio (CRR),
which would have been counter to its tight policy.
The RBI revised its WPI inflation forecast for March
2011 to 7%YoY from 5.5% (CLSA: around 6.5%).
The revision should be seen in the context of the
partly temporary nature of the supply-side factors
affecting the inflation trajectory. Note that the RBI is
not a formal inflation targeter and the magnitude of
the forecast revision has little to do with the
magnitude of the policy action. Thus, in January
2010, the RBI revised its inflation guidance for
March 2011 to 8.5% from 6%, but did not do
anything to policy rates, although it hiked the CRR.
The RBI remains worried about the risks to inflation
from the local structural demand-supply imbalance
that has been contributing to food inflation, higher
global commodity prices, and the quality of fiscal
consolidation. It expects the liquidity shortage to ease
as government balances adjust to the expenditure
schedule. It again prodded the banks to focus on the
underlying structural cause of liquidity tightness due
to the gap between the credit and deposit growth.
We maintain that the RBI will hike by 25bps each at
the March and possibly April policy reviews, which
will take the repo rate to 7%. The annual policy in
April is likely to announce an inflation guidance of
around 6% for March 2012. The deceleration in GDP
growth in 2011-12 (CLSA: 8.3%) from an estimated
8.8% this year should partly ease demand-driven
inflationary pressures, but the supply-side drivers will
persist. The government has to come in with greater
expenditure control in the forthcoming budget. Fiscal
and monetary policies cannot work against each other.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
INDIA MONETARY POLICY -
RBI hikes rates, more to come
As expected, the RBI hiked policy rates by 25bps,
and continued to tighten policy. A small minority was
expecting a bigger 50bps increase, but the RBI
preferred – justifiably, in our view – to stay with a
25bps move. Following the latest hike, the repo and
the reverse repo rates are at 6.50% and 5.50%,
respectively, and the RBI has increased policy rates
by 325bps since the start of CY2010.
Not surprisingly, the tone of the policy statement was
hawkish. In order to ease the ongoing liquidity deficit,
the RBI extended the temporary liquidity support of
up to 1% of net demand and time liabilities to 8 April.
Contrary to expectations, the RBI did not succumb to
the pressure for cutting the cash reserve ratio (CRR),
which would have been counter to its tight policy.
The RBI revised its WPI inflation forecast for March
2011 to 7%YoY from 5.5% (CLSA: around 6.5%).
The revision should be seen in the context of the
partly temporary nature of the supply-side factors
affecting the inflation trajectory. Note that the RBI is
not a formal inflation targeter and the magnitude of
the forecast revision has little to do with the
magnitude of the policy action. Thus, in January
2010, the RBI revised its inflation guidance for
March 2011 to 8.5% from 6%, but did not do
anything to policy rates, although it hiked the CRR.
The RBI remains worried about the risks to inflation
from the local structural demand-supply imbalance
that has been contributing to food inflation, higher
global commodity prices, and the quality of fiscal
consolidation. It expects the liquidity shortage to ease
as government balances adjust to the expenditure
schedule. It again prodded the banks to focus on the
underlying structural cause of liquidity tightness due
to the gap between the credit and deposit growth.
We maintain that the RBI will hike by 25bps each at
the March and possibly April policy reviews, which
will take the repo rate to 7%. The annual policy in
April is likely to announce an inflation guidance of
around 6% for March 2012. The deceleration in GDP
growth in 2011-12 (CLSA: 8.3%) from an estimated
8.8% this year should partly ease demand-driven
inflationary pressures, but the supply-side drivers will
persist. The government has to come in with greater
expenditure control in the forthcoming budget. Fiscal
and monetary policies cannot work against each other.
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