Credit Suisse, In RBIs own words: "Reserve Bank is likely to persist with the current inflationary stance"

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India Economics-------------------------------------------------------------------------------------------------
In RBIs own words: "Reserve Bank is likely to persist with the current inflationary stance"



● The RBI hiked key policy rates by 25 bp as expected.
● Further rate hikes look like a given if one were to go by the
central bank’s concluding statement: “Reserve Bank is likely to
persist with the current anti-inflationary stance”.
● Interesting reading of Japan’s impact. RBI highlighted potential
further upward pressure on petroleum prices as demand for
thermal energy increases to substitute for nuclear.
● Inflation concerns remained RBIs focus even though the central
bank felt that investment growth may be slowing down



RBI hiked by 25 bp
RBI hiked key policy rates by 25 bp as was widely expected. The
reverse repo now stands at 5.75% and the repo rate at 6.75%, both
up about 200 to 250 bp from previous lows. The reverse repo rate
(bottom of the policy rate corridor) is almost back to the previous high
of 6% but the repo rate (upper end of the corridor, and the operational
rate right now) is still much below its (brief) previous peak of 9% seen
in September 2008.
Some further tightening looks like a given
Another couple of hikes look like a given if one were to go by the
RBI’s concluding statement “Reserve Bank is likely to persist with the
current anti-inflationary stance”. We maintain our expectation for the
central bank to raise rates by another 50 bp in the next two or three
meetings (it reviews policy every six weeks).
Impact of Japan? Higher petro prices
It has an interesting read of the possible consequences of the Japan
calamity. While everyone is talking about growth concerns from the
unfortunate earthquakes in Japan, the RBI sees possible inflation
risks from the event. While the RBI acknowledged that it is ‘too early’
to assess the macroeconomic consequences of Japan’s natural
disaster, it highlighted a potential further upward pressure on
petroleum prices as thermal energy substitutes for nuclear. On the
impact from Japan’s events on domestic growth, unless there are
notable negative consequences for global growth/risk appetite at large,
we believe direct impact on India’s growth should be limited since
India’s exports to Japan are relatively low at less than 1% of GDP.
Inflation concerns remain the focus …
Inflation concerns remain the focus. On food prices, we were
impressed to note that unlike some market participants, The RBI
hasn’t read too much into the recent decline in raw food prices. While
acknowledging the decline, the central bank simultaneously noted that
prices of “milk, eggs, meat and fish continue to remain high reflecting
structural demand-supply imbalances”. In our own view too, the recent
decline in primary food prices is likely to prove to be temporary. On
fuel prices, the central bank sees “potential for further rise”. Its
hawkishness was most visible in its assessment of the ‘non-food
manufactured’ WPI inflation as having risen “sharply” – the central
bank (and many others) tend to look at this (non-food manufactured
sub-index of the WPI) as an indicator of demand side pressures. (Side
note: Technically, in our view, this is not an ideal measure of demandside
pressures since this index is replete with inputs like steel,
chemicals, textiles rather than finished consumer goods (and these
inputs are driven to quite an extent by global commodity price trends).
Which is not to say that we think there is no demand side pressure
domestically With the economy at trend or above trend levels, we
think demand is strong enough for these large input price increases to
seep through to the final consumer price inflation.)
… Even as RBI feels investment growth might be slowing
The RBI reading of domestic growth. Overall positive – it sites the
latest PMIs, tax collections, exports and bank credit as suggesting that
growth momentum ‘persists’. But the central bank did note risks to the
investment climate from ongoing uncertainty on high commodity
prices and felt that ‘investment momentum may be slowing down’. In
our view, higher domestic fuel prices (the fuel index of the WPI is 5%
above the 2008 peak) and borrowing costs are likely to be constraints
on domestic growth and we maintain our view for GDP growth (7.7%
estimated for 2011) to be at the low-end of consensus expectations