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RBI hiked the repo and reverse repo rate by 25bp today, in line with expectations. It expects
to persist with its anti-inflationary stance - so expect at least another 50bp of rate hikes this
calendar.
RBI hiked policy rates by 25bp
The Reserve Bank of India (RBI) earlier today in its mid-quarter monetary policy review
for March hiked both the repo rate (to 6.75%) and the reverse repo rate (to 5.75%) by
25bp. This hike was in line with RBS and consensus expectations.
Anti-inflationary stance to be maintained
RBI expects to maintain its current anti-inflationary stance; as such, we expect at least
another 50bp of rate hikes this calendar.
RBI expects inflation risks to remain on the upside as domestic fuel prices are yet to
adjust fully to global prices, and demand side pressures are persistent (as reflected in
non-food manufacturing inflation).
The Reserve Bank also raised its March 2011 WPI inflation target to around 8% from its
earlier target of 7%, to take into account February's acceleration in core manufactured
products inflation, higher international crude prices, and the increase in administered coal
prices.
The weekly inflation data for 5 March 2011 was also released today. The fuel and power
WPI increased 3.6% week on week primarily due to higher administered prices of coal -
coking coal up 33%, non-coking coal up 27%, and lignite up 17%. Coal India had raised
prices for select grades of coal in the last week of February. This increase in the fuel &
power WPI should add 55 bp to the headline inflation number for March.
RBI's macro outlook
Per the RBI's statement, "Underlying inflationary pressures have accentuated, even as
risks to growth are emerging. Rising global commodity prices, particularly oil, are a major
contributor to both developments."
RBI now expects a FY11 current account deficit of 2.5% of GDP, much lower than its
>3% expectation in its second quarter review of monetary policy in early November due
to the recent robust export performance.
Investment conclusion
Market level valuations are now close to historical averages, with MSCI India trading at a 12M
forward P/E of around 14.5-15x versus a ten-year historical average of ~14.2x.
Though headline yoy WPI inflation should moderate from current levels of 8.3%, it is unlikely
to revert to the RBI's comfort level of 4-5% anytime over the next four-five months. As such,
inflation will continue to be a macro concern for India.
We would wait for more attractive valuations (~10% below current levels), and more clarity on
the inflation picture to recommend aggressively buying Indian equities.
Crude oil prices continue to be a wild card with every US$10 swing in prices impacting India's
current account deficit by 50bp, and its fiscal deficit by 20-30bp.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RBI hiked the repo and reverse repo rate by 25bp today, in line with expectations. It expects
to persist with its anti-inflationary stance - so expect at least another 50bp of rate hikes this
calendar.
RBI hiked policy rates by 25bp
The Reserve Bank of India (RBI) earlier today in its mid-quarter monetary policy review
for March hiked both the repo rate (to 6.75%) and the reverse repo rate (to 5.75%) by
25bp. This hike was in line with RBS and consensus expectations.
Anti-inflationary stance to be maintained
RBI expects to maintain its current anti-inflationary stance; as such, we expect at least
another 50bp of rate hikes this calendar.
RBI expects inflation risks to remain on the upside as domestic fuel prices are yet to
adjust fully to global prices, and demand side pressures are persistent (as reflected in
non-food manufacturing inflation).
The Reserve Bank also raised its March 2011 WPI inflation target to around 8% from its
earlier target of 7%, to take into account February's acceleration in core manufactured
products inflation, higher international crude prices, and the increase in administered coal
prices.
The weekly inflation data for 5 March 2011 was also released today. The fuel and power
WPI increased 3.6% week on week primarily due to higher administered prices of coal -
coking coal up 33%, non-coking coal up 27%, and lignite up 17%. Coal India had raised
prices for select grades of coal in the last week of February. This increase in the fuel &
power WPI should add 55 bp to the headline inflation number for March.
RBI's macro outlook
Per the RBI's statement, "Underlying inflationary pressures have accentuated, even as
risks to growth are emerging. Rising global commodity prices, particularly oil, are a major
contributor to both developments."
RBI now expects a FY11 current account deficit of 2.5% of GDP, much lower than its
>3% expectation in its second quarter review of monetary policy in early November due
to the recent robust export performance.
Investment conclusion
Market level valuations are now close to historical averages, with MSCI India trading at a 12M
forward P/E of around 14.5-15x versus a ten-year historical average of ~14.2x.
Though headline yoy WPI inflation should moderate from current levels of 8.3%, it is unlikely
to revert to the RBI's comfort level of 4-5% anytime over the next four-five months. As such,
inflation will continue to be a macro concern for India.
We would wait for more attractive valuations (~10% below current levels), and more clarity on
the inflation picture to recommend aggressively buying Indian equities.
Crude oil prices continue to be a wild card with every US$10 swing in prices impacting India's
current account deficit by 50bp, and its fiscal deficit by 20-30bp.
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