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India Macro Watch
Cutting growth on higher rates
50bp hike in RBI policy rates
Reverse repo Repo rates
Actual: 6.25% 7.25%
Previous: 5.75% 6.75%
Consensus: 6.0% 7.0%
BofAML: 6.0% 7.0%
Bottom line: 7.8% FY12 growth on 75bp more RBI rate hikes
„ We are cutting our FY12 growth forecast 40bp to 7.8% on rising interest rates
(Table 2 and Chart 1). Notwithstanding today’s ‘strong’ 50bp action, we do
not think Gov Subbarao will be able to resist hiking another 75bp by October
(Chart 2). After all, inflation will not peak before September – as the RBI itself
acknowledged today (Chart 3). Given that rising lending rates will impact
growth after another 100-150bp, every additional 25bp will now matter. Given
today’s 50bp saving deposit rate hike and higher provisioning norms, banks
will likely hike lending rates by 25bp in the June quarter itself (Appendix 1
tables key measures). This, in turn, has prompted us to cut our growth
forecast today. At the same time, downside risks from about-8% growth
should remain limited, in our view. In fact, our just-released India lead
indicator actually still remains pretty bullish here.
Why it matters: Interest rates cycling up
„ We continue to expect the RBI to hike policy rates by another 25bp each on
June 16, July 26 and October 25. In reaction, lending rates should go up
75bp in 2HFY12 on excess loan demand (after June’s 25bp). As expected,
the RBI wants to restrain money/deposit growth rate to 17% (17.1%
BofAMLe) below its 19% loan demand forecast (19.2% BofA MLe). Even so,
it will need to inject about Rs1,500bn via OMO to generate this order of
money/ deposit expansion with a high 3% of GDP current account deficit
restraining fx intervention. This, in turn, should encase the 10y in a range
about a mid-cycle 8% despite a high 7.9% of GDP fiscal deficit. Of course,
the RBI will need not OMO till July-August as the money market deficit will
remain below the indicative trigger of 1% of bank book (Rs500bn) (Table 3).
Details: What Gov Subbarao wants to do
„ Maintain an interest rate environment that moderates inflation and anchors
inflation expectations.
„ Foster an environment of price stability that is conducive to sustaining growth
in the medium-term coupled with financial stability.
„ Manage liquidity to ensure that it remains broadly in balance, with neither a
large surplus diluting monetary transmission nor a large deficit choking off
fund flows.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Macro Watch
Cutting growth on higher rates
50bp hike in RBI policy rates
Reverse repo Repo rates
Actual: 6.25% 7.25%
Previous: 5.75% 6.75%
Consensus: 6.0% 7.0%
BofAML: 6.0% 7.0%
Bottom line: 7.8% FY12 growth on 75bp more RBI rate hikes
„ We are cutting our FY12 growth forecast 40bp to 7.8% on rising interest rates
(Table 2 and Chart 1). Notwithstanding today’s ‘strong’ 50bp action, we do
not think Gov Subbarao will be able to resist hiking another 75bp by October
(Chart 2). After all, inflation will not peak before September – as the RBI itself
acknowledged today (Chart 3). Given that rising lending rates will impact
growth after another 100-150bp, every additional 25bp will now matter. Given
today’s 50bp saving deposit rate hike and higher provisioning norms, banks
will likely hike lending rates by 25bp in the June quarter itself (Appendix 1
tables key measures). This, in turn, has prompted us to cut our growth
forecast today. At the same time, downside risks from about-8% growth
should remain limited, in our view. In fact, our just-released India lead
indicator actually still remains pretty bullish here.
Why it matters: Interest rates cycling up
„ We continue to expect the RBI to hike policy rates by another 25bp each on
June 16, July 26 and October 25. In reaction, lending rates should go up
75bp in 2HFY12 on excess loan demand (after June’s 25bp). As expected,
the RBI wants to restrain money/deposit growth rate to 17% (17.1%
BofAMLe) below its 19% loan demand forecast (19.2% BofA MLe). Even so,
it will need to inject about Rs1,500bn via OMO to generate this order of
money/ deposit expansion with a high 3% of GDP current account deficit
restraining fx intervention. This, in turn, should encase the 10y in a range
about a mid-cycle 8% despite a high 7.9% of GDP fiscal deficit. Of course,
the RBI will need not OMO till July-August as the money market deficit will
remain below the indicative trigger of 1% of bank book (Rs500bn) (Table 3).
Details: What Gov Subbarao wants to do
„ Maintain an interest rate environment that moderates inflation and anchors
inflation expectations.
„ Foster an environment of price stability that is conducive to sustaining growth
in the medium-term coupled with financial stability.
„ Manage liquidity to ensure that it remains broadly in balance, with neither a
large surplus diluting monetary transmission nor a large deficit choking off
fund flows.
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