Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Gradualism revisited: RBI hikes policy rate by 25bps
As expected, the RBI raised the policy (repo) rate by 25bps. The hawkish statement emphasized the upside risks to
inflation from global commodity prices and demand-led price pressures, but also downside risks to global growth,
suggesting that they will continue to tighten but resume the gradualist approach for now. An additional 75 bps are
expected over the next 9 months, with the next hike to be delivered during the third quarter.
Facts
As expected, the policy rate (the repurchase or repo rate) was raised by 25bps to 7.5%. Consequently, the reverse repo and
marginal standing facility rates were automatically adjusted by 25bps to 6.5 and 8.5, respectively. The cash reserve ratio
(CRR) was kept unchanged at 6%.
On the external environment, the statement, not surprisingly, noted "an increase in downside risks to global growth prospects."
They pointed to a moderation in global growth due to elevated commodity prices, the spillover from the natural disaster
in Japan, and monetary tightening in Japan. Higher "uncertainty about the resolution of the sovereign debt problem in the
euro area" was also highlighted. Interestingly, the statement notes that "from [RBI's] monetary policy perspective, global
commodity prices still remain the key external risk though some signs of moderation are becoming visible."
On the Indian economy, the RBI did not seem particularly concerned about the recent moderation, with "domestic conditions
broadly consistent" with their projections. In this context, it was also noted that "even as there is deceleration in some
important sectors, notably interest sensitive ones such as automobiles, there is no evidence of any sharp or broad-based
slowdown." In support of that view, the statement refers to "buoyant" capital goods production in April, steady growth in
credit, and HSBC PMI readings showing "reasonably good conditions."
Turning to inflation, the statement strikes a concerned tone, referring to inflation being at "uncomfortable levels." It is pointed
out that "headline numbers understate the pressure because fuel prices have yet to reflect global crude oil prices." Moreover,
the uptrend in core inflation (non-food manufacturing WPI) "is a matter of particular concern" and "suggests more generalized
inflation pressures."
Interpretation
As expected the RBI returned to the gradualist approach, moving by 25 rather than 50 bps, in light of the softening in the
global economic cycle. However, inflation is clearly seen as the primary concern still.
Essentially, the statement was still hawkish, noting upside risks to inflation from commodity prices. The RBI does not appear
to be convinced that the current easing in global commodity price will last. Moreover, the level of commodity prices is still
high, which in RBI's view is a concern in itself, partly because domestic fuel prices have yet to fully reflect this higher level
(read: adjustment in gasoline and diesel prices still to come).
RBI is also clearly concerned about the generalized price pressures in the economy due to strong demand conditions and
tight capacity, which leaves companies with strong pricing power and is leading to wage pressures. Moreover, with RBI not
seeing evidence of a "sharp or broad-based" deceleration of growth, they are concerned that these prices pressures will not
ease anytime soon. This, as they note, means that "the challenge of containing inflation and anchoring inflation expectations
persists."
Now, they are not agnostic about the softening in the global economic cycle, which is why they guide expectations by saying
that "while the RBI needs to continue with its anti-inflationary stance, the extent of policy action needs to balance the adverse
movements in inflation with recent global developments and their likely impact on the domestic growth trajectory." This does
not mean that they are signaling a pause. No, it means that they are maintaining the tightening bias, but, as things stand now,
will continue to tighten only at a gradual rather than aggressive pace.
Bottom line: The 25bp hike was in line with expectations. This was another gradual move, but understandable given the
global economic uncertainties. However, the statement was hawkish and signaled continue tightening, although a return to the
gradualist approach. The next hike is seen in Q3.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Gradualism revisited: RBI hikes policy rate by 25bps
As expected, the RBI raised the policy (repo) rate by 25bps. The hawkish statement emphasized the upside risks to
inflation from global commodity prices and demand-led price pressures, but also downside risks to global growth,
suggesting that they will continue to tighten but resume the gradualist approach for now. An additional 75 bps are
expected over the next 9 months, with the next hike to be delivered during the third quarter.
Facts
As expected, the policy rate (the repurchase or repo rate) was raised by 25bps to 7.5%. Consequently, the reverse repo and
marginal standing facility rates were automatically adjusted by 25bps to 6.5 and 8.5, respectively. The cash reserve ratio
(CRR) was kept unchanged at 6%.
On the external environment, the statement, not surprisingly, noted "an increase in downside risks to global growth prospects."
They pointed to a moderation in global growth due to elevated commodity prices, the spillover from the natural disaster
in Japan, and monetary tightening in Japan. Higher "uncertainty about the resolution of the sovereign debt problem in the
euro area" was also highlighted. Interestingly, the statement notes that "from [RBI's] monetary policy perspective, global
commodity prices still remain the key external risk though some signs of moderation are becoming visible."
On the Indian economy, the RBI did not seem particularly concerned about the recent moderation, with "domestic conditions
broadly consistent" with their projections. In this context, it was also noted that "even as there is deceleration in some
important sectors, notably interest sensitive ones such as automobiles, there is no evidence of any sharp or broad-based
slowdown." In support of that view, the statement refers to "buoyant" capital goods production in April, steady growth in
credit, and HSBC PMI readings showing "reasonably good conditions."
Turning to inflation, the statement strikes a concerned tone, referring to inflation being at "uncomfortable levels." It is pointed
out that "headline numbers understate the pressure because fuel prices have yet to reflect global crude oil prices." Moreover,
the uptrend in core inflation (non-food manufacturing WPI) "is a matter of particular concern" and "suggests more generalized
inflation pressures."
Interpretation
As expected the RBI returned to the gradualist approach, moving by 25 rather than 50 bps, in light of the softening in the
global economic cycle. However, inflation is clearly seen as the primary concern still.
Essentially, the statement was still hawkish, noting upside risks to inflation from commodity prices. The RBI does not appear
to be convinced that the current easing in global commodity price will last. Moreover, the level of commodity prices is still
high, which in RBI's view is a concern in itself, partly because domestic fuel prices have yet to fully reflect this higher level
(read: adjustment in gasoline and diesel prices still to come).
RBI is also clearly concerned about the generalized price pressures in the economy due to strong demand conditions and
tight capacity, which leaves companies with strong pricing power and is leading to wage pressures. Moreover, with RBI not
seeing evidence of a "sharp or broad-based" deceleration of growth, they are concerned that these prices pressures will not
ease anytime soon. This, as they note, means that "the challenge of containing inflation and anchoring inflation expectations
persists."
Now, they are not agnostic about the softening in the global economic cycle, which is why they guide expectations by saying
that "while the RBI needs to continue with its anti-inflationary stance, the extent of policy action needs to balance the adverse
movements in inflation with recent global developments and their likely impact on the domestic growth trajectory." This does
not mean that they are signaling a pause. No, it means that they are maintaining the tightening bias, but, as things stand now,
will continue to tighten only at a gradual rather than aggressive pace.
Bottom line: The 25bp hike was in line with expectations. This was another gradual move, but understandable given the
global economic uncertainties. However, the statement was hawkish and signaled continue tightening, although a return to the
gradualist approach. The next hike is seen in Q3.
No comments:
Post a Comment