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India Equity Research Reports, IPO and Stock News
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Economy
Monetary Policy
RBI Credit Policy: Inflation rules the roost. The RBI during today’s mid-quarter
meeting decided to raise repo and reverse repo rates by 25 bps each citing reasons of
demand-side pressures in the economy. The policy maintains its anti-inflationary bias as
inflation has continued to surprise on the upside. In a bid to control expectations, the
RBI stressed the necessity to maintain a calibrated approach to the rate hike cycle.
CRR and SLR rates were kept unchanged at 6% and 24%, respectively.
Inflation has started showing demand-side pressures; end-FY2011E estimate of RBI raised to 8%
The RBI acknowledged that food articles inflation has softened but protein-rich items inflation
continue to be high. Also, non-food manufactured products inflation in February rose sharply
indicating demand-side pressures in the economy. The acceleration of inflation across the
manufacturing sectors indicates that pricing power is present in the economy. Concerns remain on
the impact of the high international crude prices on petroleum products and non-food
manufactured products. From its earlier estimate of end-FY2011E inflation at 7%, the RBI raised
the estimate to 8%. We now see the end-March 2011 inflation number at 8.20%. Inflation is also
expected to remain sticky and hover around the 7.5% mark in 1HFY12E, prompting further policy
actions from RBI. The policy communiqué lauded the Union Budget on the efforts to raise
agricultural productivity and ease demand-side pressures but remained concerned on the subsidies
front. In line with what we have been highlighting, the RBI opines that focus should be on ‘quality
of expenditure’ whereby the aggregate is under control without compromising on ’delivery of
services‘. This balance is essential in demand-side inflation management.
Growth not an immediate concern; we expect FY2012E to see some moderation
The scenario in the US and Euro Area has started showing optimism in terms of starting to gain
growth momentum. On the situation of Japan, the RBI views that the macroeconomic impact is
too early to assess but further upside to crude prices may come from the shift of Japan to thermal
energy from nuclear energy. The RBI sounded comfortable with domestic growth scenario as
agricultural production is likely to be strong as indicated by rabi crop sowing along with other
indicators like PMI, direct, indirect taxes and credit growth. We believe that though FY2011E
growth might not be a concern, a moderation in growth is likely in FY2012E. This might be a
deterrent for RBI in terms of aggressive rate hikes. Along with a cyclical moderation, dampening in
the investment situation may also come from high commodity prices. As highlighted by the RBI,
the weak performance of capital goods may be indicative of slowing investment momentum.
Liquidity to be at a comfortable level; reining in inflation expectations primary aim of RBI
The RBI expects liquidity to move towards its comfort level of (+/-)1% of NDTL with temporary
imbalances coming from the advance tax collections. Decline in government cash balances with
the RBI has further eased the liquidity pressures. The main aim of the RBI will be to rein in
demand-side pressures without affecting growth and managing inflationary expectations and
containing spillover of food and commodity price inflation into more generalized inflation.
RBI to stay hawkish; likely to continue with hikes of 25 bps
We believe that the RBI will continue to focus on inflation and maintain its rate hiking cycle of
doses of 25 bps each. We expect the RBI to raise the repo and reverse repo rates by 50-75 bps
more from the current levels of 6.75% and 5.75%, respectively. RBI has removed the term
’calibrated increases‘ in this document. Our assessment is that RBI could stick to the 25 bps dose
unless there is any run-away pressure on inflation as the document also makes it clear that some
“risks to growth are emerging"
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Monetary Policy
RBI Credit Policy: Inflation rules the roost. The RBI during today’s mid-quarter
meeting decided to raise repo and reverse repo rates by 25 bps each citing reasons of
demand-side pressures in the economy. The policy maintains its anti-inflationary bias as
inflation has continued to surprise on the upside. In a bid to control expectations, the
RBI stressed the necessity to maintain a calibrated approach to the rate hike cycle.
CRR and SLR rates were kept unchanged at 6% and 24%, respectively.
Inflation has started showing demand-side pressures; end-FY2011E estimate of RBI raised to 8%
The RBI acknowledged that food articles inflation has softened but protein-rich items inflation
continue to be high. Also, non-food manufactured products inflation in February rose sharply
indicating demand-side pressures in the economy. The acceleration of inflation across the
manufacturing sectors indicates that pricing power is present in the economy. Concerns remain on
the impact of the high international crude prices on petroleum products and non-food
manufactured products. From its earlier estimate of end-FY2011E inflation at 7%, the RBI raised
the estimate to 8%. We now see the end-March 2011 inflation number at 8.20%. Inflation is also
expected to remain sticky and hover around the 7.5% mark in 1HFY12E, prompting further policy
actions from RBI. The policy communiqué lauded the Union Budget on the efforts to raise
agricultural productivity and ease demand-side pressures but remained concerned on the subsidies
front. In line with what we have been highlighting, the RBI opines that focus should be on ‘quality
of expenditure’ whereby the aggregate is under control without compromising on ’delivery of
services‘. This balance is essential in demand-side inflation management.
Growth not an immediate concern; we expect FY2012E to see some moderation
The scenario in the US and Euro Area has started showing optimism in terms of starting to gain
growth momentum. On the situation of Japan, the RBI views that the macroeconomic impact is
too early to assess but further upside to crude prices may come from the shift of Japan to thermal
energy from nuclear energy. The RBI sounded comfortable with domestic growth scenario as
agricultural production is likely to be strong as indicated by rabi crop sowing along with other
indicators like PMI, direct, indirect taxes and credit growth. We believe that though FY2011E
growth might not be a concern, a moderation in growth is likely in FY2012E. This might be a
deterrent for RBI in terms of aggressive rate hikes. Along with a cyclical moderation, dampening in
the investment situation may also come from high commodity prices. As highlighted by the RBI,
the weak performance of capital goods may be indicative of slowing investment momentum.
Liquidity to be at a comfortable level; reining in inflation expectations primary aim of RBI
The RBI expects liquidity to move towards its comfort level of (+/-)1% of NDTL with temporary
imbalances coming from the advance tax collections. Decline in government cash balances with
the RBI has further eased the liquidity pressures. The main aim of the RBI will be to rein in
demand-side pressures without affecting growth and managing inflationary expectations and
containing spillover of food and commodity price inflation into more generalized inflation.
RBI to stay hawkish; likely to continue with hikes of 25 bps
We believe that the RBI will continue to focus on inflation and maintain its rate hiking cycle of
doses of 25 bps each. We expect the RBI to raise the repo and reverse repo rates by 50-75 bps
more from the current levels of 6.75% and 5.75%, respectively. RBI has removed the term
’calibrated increases‘ in this document. Our assessment is that RBI could stick to the 25 bps dose
unless there is any run-away pressure on inflation as the document also makes it clear that some
“risks to growth are emerging"
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