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RBI revises upwards March inflation outlook to around 8.0% YoY from 7.0%
The Reserve Bank of India (RBI) raised its overnight repo rate (at which it lends
to commercial banks) 25bps to 6.75% at its mid-quarterly monetary policy review
on March 17 (Figure 1). It also raised its reverse repo rate (at which it pays
interests on deposits from commercial banks) 25bps to 5.75%. It maintained the
cash reserve ratio (CRR) of 6.00% and 24.0% statutory liquidity ratio (Figure
1).This was the RBI’s second rate hike of 2011 after raising interest rates at its
January 25 quarterly monetary policy review and the eighth hike since it
embarked on a policy of monetary tightening on March 19, 2010.
The RBI’s decision to raise interest rates comes against a backdrop of increasing
domestic inflationary pressure. India’s wholesale price index (WPI) for February
(announced March 14) rose 8.3% YoY, exceeding the market consensus forecast
of 7.8%. At its mid-quarterly review, the RBI said that food-price inflation,
particularly for vegetables, had slowed, but emphasized that fuel prices were still
high and non-food manufactured goods inflation rose to 6.1% in February from
4.8% in January (Figure 2). The bank also pointed out that accelerating inflation
is spreading to the manufacturing industry as manufacturers pass on higher raw
material and energy costs to consumers
At its quarterly monetary policy review on January 25, the RBI raised the WPI
inflation forecast for March 2011 to 7.0% YoY from 5.5%, and subsequently
raised this to 8.0% at its most recent meeting. The bank cited the risk of the rising
international price of crude on liberalized gasoline prices, administered coal
prices (an alternative fuel), and prices for non-food processed goods.
The RBI expects agricultural production to be firm this year given an improved
harvest in the rabi season (dry season) from a year earlier. Despite sharp
changes in the IIP, the bank says the domestic economy is continuing to expand
in light of firm data for manufacturing PMI, tax income, and trade statistics. That
said, the RBI highlighted a possibility of weakening appetite for private-sector
investment given higher fuel prices and a slowdown in capital goods output.
The RBI took a bullish stance on the economies of emerging nations and in the
US and EU, but also pointed to increasing uncertainty over the pace of growth
given the unrest in the Middle East and North Africa. The bank did not consider
the consequences of the Tohoku earthquake, but did point to the likelihood of
upward pressure on crude prices given the uncertainty over nuclear power.
We think inflationary pressure will continue to rise in India due to rising
commodity prices and domestic tightening of demand. We therefore expect the
RBI to continue hiking its policy rate in instalments by a total of 75bps through
March 2012 to tamp down inflation. We expect inflation to fall below 6.0% YoY by
March 2012 as the pace of growth in WPI slows due to a tightening of total
demand spurred by an increase in real interest rates.
The rise in the policy rate is likely to lead to a weakening of capex given the
knock-on effect on commercial banks’ lending rates (Figure 3). However, the
government has increased planned infrastructure spending by 23% YoY in its
2011-12 budget, and looks for urban rail, roads, power station and other
infrastructure building to take off through public private partnerships as overseas
investment increases. Consumer spending will likely continue to increase on the
back of purchases of durable goods and we expect both consumer and
infrastructure spending to drive India’s economic growth going forward.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RBI revises upwards March inflation outlook to around 8.0% YoY from 7.0%
The Reserve Bank of India (RBI) raised its overnight repo rate (at which it lends
to commercial banks) 25bps to 6.75% at its mid-quarterly monetary policy review
on March 17 (Figure 1). It also raised its reverse repo rate (at which it pays
interests on deposits from commercial banks) 25bps to 5.75%. It maintained the
cash reserve ratio (CRR) of 6.00% and 24.0% statutory liquidity ratio (Figure
1).This was the RBI’s second rate hike of 2011 after raising interest rates at its
January 25 quarterly monetary policy review and the eighth hike since it
embarked on a policy of monetary tightening on March 19, 2010.
The RBI’s decision to raise interest rates comes against a backdrop of increasing
domestic inflationary pressure. India’s wholesale price index (WPI) for February
(announced March 14) rose 8.3% YoY, exceeding the market consensus forecast
of 7.8%. At its mid-quarterly review, the RBI said that food-price inflation,
particularly for vegetables, had slowed, but emphasized that fuel prices were still
high and non-food manufactured goods inflation rose to 6.1% in February from
4.8% in January (Figure 2). The bank also pointed out that accelerating inflation
is spreading to the manufacturing industry as manufacturers pass on higher raw
material and energy costs to consumers
At its quarterly monetary policy review on January 25, the RBI raised the WPI
inflation forecast for March 2011 to 7.0% YoY from 5.5%, and subsequently
raised this to 8.0% at its most recent meeting. The bank cited the risk of the rising
international price of crude on liberalized gasoline prices, administered coal
prices (an alternative fuel), and prices for non-food processed goods.
The RBI expects agricultural production to be firm this year given an improved
harvest in the rabi season (dry season) from a year earlier. Despite sharp
changes in the IIP, the bank says the domestic economy is continuing to expand
in light of firm data for manufacturing PMI, tax income, and trade statistics. That
said, the RBI highlighted a possibility of weakening appetite for private-sector
investment given higher fuel prices and a slowdown in capital goods output.
The RBI took a bullish stance on the economies of emerging nations and in the
US and EU, but also pointed to increasing uncertainty over the pace of growth
given the unrest in the Middle East and North Africa. The bank did not consider
the consequences of the Tohoku earthquake, but did point to the likelihood of
upward pressure on crude prices given the uncertainty over nuclear power.
We think inflationary pressure will continue to rise in India due to rising
commodity prices and domestic tightening of demand. We therefore expect the
RBI to continue hiking its policy rate in instalments by a total of 75bps through
March 2012 to tamp down inflation. We expect inflation to fall below 6.0% YoY by
March 2012 as the pace of growth in WPI slows due to a tightening of total
demand spurred by an increase in real interest rates.
The rise in the policy rate is likely to lead to a weakening of capex given the
knock-on effect on commercial banks’ lending rates (Figure 3). However, the
government has increased planned infrastructure spending by 23% YoY in its
2011-12 budget, and looks for urban rail, roads, power station and other
infrastructure building to take off through public private partnerships as overseas
investment increases. Consumer spending will likely continue to increase on the
back of purchases of durable goods and we expect both consumer and
infrastructure spending to drive India’s economic growth going forward.
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