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Just how can RBI pause?
Bottom line: 25bp RBI rate hike on June 16
„ We do not believe that the RBI can pause on June 16 on growth concerns as
some in the OIS market have begun to hope. Although growth is slowing, it
will likely still remain reasonably close to 8% potential. Yes, we do think May
3's 50bp hike in both policy and saving deposit rates was overkill as much of
inflation is 'imported' and rates already high. Yet, a pause at 8.5+% inflation
would send a wrong message. We thus expect Gov Subbarao to hike policy
rates 25bp on June 16. At the same time, to cushion the impact, Delhi will
likely hold public sector bank lending rates for now, especially given that loan
demand has slackened seasonally. Do read our GDP downgrade report here.
Why it matters: Rates to cycle up
We expect rates to grind higher, although lending rates are hitting the
previous cyclical peak of mid-2008. Our base case has the RBI hiking 75bp
till October when inflation will likely top off (Chart 1). Banks should also hike
lending rates by 75bp in the busy season with a tight liquidity policy holding
deposit growth (17% BofA MLe) below loan demand (19% BofA MLe).
Nonetheless, we expect the 10y to trade in a range about a mid-cycle 8%
with RBI OMO (Rs1500bn BofA MLe) partly offsetting fiscal overrun (0.7% of
GDP) in 2HFY12. Not surprisingly, the 10y has come off after spiking to 8.5%
last week. For details, do see our liquidity report (with Rudy Loo-Kung) here.
Details: What can trigger an early RBI pause?
7.5% inflation: Dr Rangarajan, chairman, PM's Economic Advisory Council,
has said that the RBI can stop tightening only once inflation dips below 7.5%.
As of now, we do not expect this till December, even assuming a good
monsoon douses agflation (Chart 2). After all, Delhi will likely hike diesel,
cooking gas and petrol prices by 10% by this weekend. This will add 70bp
directly to inflation and 120bp overall in 6 months. Do read our oil report here.
„ Drop in global commodity prices: Can inflation slip to 7.5% sooner? Yes,
if global commodity prices drop off earlier. As of now, our oil analysts expect
Dated Brent to come off to US$94/bbl only by December. If global commodity
prices do ease, the pass-through will likely be quite rapid. In case of raw
cotton, the fall in global prices has already led to a correction in local prices.
„ Sub-7.5% growth panic: Delhi will call likely off tightening if growth falls
below 7.5% levels. As of now, however, we expect FY12 growth to bottom out
at 7.5% levels in 2H11 if the monsoon does not disappoint (Chart 3). Rains,
at least, have arrived on time. One bit of good news is that the Southern
Oscillation Index has stabilized this week after crashing to 1.7 from 25.1 on
May 1. The Australian weather bureau expects it to persist in neutral between
+8 (which sets off La Nina that is good for Indian rains) and -8 (which sets off
El Nino that leads to drought) till June
„ New industrial data releasing Friday: Will growth disappoint? We should
get a better idea when the government replaces the 1993-94 index of
industrial production with the 2004-05 series on Friday. Although base effects
have pulled down y-o-y growth, industry is still growing a robust 1%
deseasonalized m-o-m in the existing data. Although higher rates will bite
ahead, y-o-y industrial numbers would have improved by mid-2011 as base
effects wore off. It remains to be seen if the new 2004-05 series paints a
similarly reassuring picture. If not, growth worries would mount.
„ Sectoral loan data: We would also monitor sectoral credit flow data for any
sudden weakness. As of now, industrial demand is peaking off gradually on
higher lending rates. Latest RBI data show that credit offtake by 8 of key 13
industrial sectors slowed between April and December 2010 (Table 2). 8/13
saw higher drawals in March-September 2010. On our part, we expect credit
demand to come off to 19% by March and 17% by September 2012 from
22.4% now (Chart 4). A quicker drop, especially in industrial credit, would
surely set alarm bells ringing in policy circles. Do read our latest credit flow
report here.
Next up in India: 2004-05 index of industrial production
India: Index of industrial production (April), Friday, 10 June 2011.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Just how can RBI pause?
Bottom line: 25bp RBI rate hike on June 16
„ We do not believe that the RBI can pause on June 16 on growth concerns as
some in the OIS market have begun to hope. Although growth is slowing, it
will likely still remain reasonably close to 8% potential. Yes, we do think May
3's 50bp hike in both policy and saving deposit rates was overkill as much of
inflation is 'imported' and rates already high. Yet, a pause at 8.5+% inflation
would send a wrong message. We thus expect Gov Subbarao to hike policy
rates 25bp on June 16. At the same time, to cushion the impact, Delhi will
likely hold public sector bank lending rates for now, especially given that loan
demand has slackened seasonally. Do read our GDP downgrade report here.
Why it matters: Rates to cycle up
We expect rates to grind higher, although lending rates are hitting the
previous cyclical peak of mid-2008. Our base case has the RBI hiking 75bp
till October when inflation will likely top off (Chart 1). Banks should also hike
lending rates by 75bp in the busy season with a tight liquidity policy holding
deposit growth (17% BofA MLe) below loan demand (19% BofA MLe).
Nonetheless, we expect the 10y to trade in a range about a mid-cycle 8%
with RBI OMO (Rs1500bn BofA MLe) partly offsetting fiscal overrun (0.7% of
GDP) in 2HFY12. Not surprisingly, the 10y has come off after spiking to 8.5%
last week. For details, do see our liquidity report (with Rudy Loo-Kung) here.
Details: What can trigger an early RBI pause?
7.5% inflation: Dr Rangarajan, chairman, PM's Economic Advisory Council,
has said that the RBI can stop tightening only once inflation dips below 7.5%.
As of now, we do not expect this till December, even assuming a good
monsoon douses agflation (Chart 2). After all, Delhi will likely hike diesel,
cooking gas and petrol prices by 10% by this weekend. This will add 70bp
directly to inflation and 120bp overall in 6 months. Do read our oil report here.
„ Drop in global commodity prices: Can inflation slip to 7.5% sooner? Yes,
if global commodity prices drop off earlier. As of now, our oil analysts expect
Dated Brent to come off to US$94/bbl only by December. If global commodity
prices do ease, the pass-through will likely be quite rapid. In case of raw
cotton, the fall in global prices has already led to a correction in local prices.
„ Sub-7.5% growth panic: Delhi will call likely off tightening if growth falls
below 7.5% levels. As of now, however, we expect FY12 growth to bottom out
at 7.5% levels in 2H11 if the monsoon does not disappoint (Chart 3). Rains,
at least, have arrived on time. One bit of good news is that the Southern
Oscillation Index has stabilized this week after crashing to 1.7 from 25.1 on
May 1. The Australian weather bureau expects it to persist in neutral between
+8 (which sets off La Nina that is good for Indian rains) and -8 (which sets off
El Nino that leads to drought) till June
„ New industrial data releasing Friday: Will growth disappoint? We should
get a better idea when the government replaces the 1993-94 index of
industrial production with the 2004-05 series on Friday. Although base effects
have pulled down y-o-y growth, industry is still growing a robust 1%
deseasonalized m-o-m in the existing data. Although higher rates will bite
ahead, y-o-y industrial numbers would have improved by mid-2011 as base
effects wore off. It remains to be seen if the new 2004-05 series paints a
similarly reassuring picture. If not, growth worries would mount.
„ Sectoral loan data: We would also monitor sectoral credit flow data for any
sudden weakness. As of now, industrial demand is peaking off gradually on
higher lending rates. Latest RBI data show that credit offtake by 8 of key 13
industrial sectors slowed between April and December 2010 (Table 2). 8/13
saw higher drawals in March-September 2010. On our part, we expect credit
demand to come off to 19% by March and 17% by September 2012 from
22.4% now (Chart 4). A quicker drop, especially in industrial credit, would
surely set alarm bells ringing in policy circles. Do read our latest credit flow
report here.
Next up in India: 2004-05 index of industrial production
India: Index of industrial production (April), Friday, 10 June 2011.
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