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RBI's post policy call suggests that future monetary policy actions will remain data dependent
with RBI monitoring global commodity prices, domestic demand (i.e., growth) and inflation
trends. That said, we do think we are only 25-50 bp away from a peak in policy rates.
Inflation AND growth data to drive policy action going forward
RBI's post policy call with analysts earlier today suggests that RBI's future policy actions
will continue to be data driven. Apart from the inflation numbers, the RBI will monitor
global commodity prices and domestic demand as it considers these to be key drivers of
core manufacturing inflation. We got the sense that the RBI would like to see most
indicators pointing in the same direction - i.e., slowing growth and lower inflation, before
signalling a change in policy stance.
Seasonally adjusted (sa) or yoy core manufacturing inflation?
In response to a question that sa core mfg. inflation had shown significant deceleration in
the June quarter (versus the yoy trend), the RBI mentioned that May and June numbers
were based on provisional data which could be subject to upward revision - as such, it
thinks that it may be too early to draw conclusions from these numbers. We asked what
metric the RBI would focus on going forward - the sa or the yoy change in core mfg.
inflation, as core yoy mfg. inflation could stay close to 7% even though the sa numbers
could be in line with the RBI's target of 4-5%. This is important as the RBI has said that it
will look for a sustained downturn in core mfg. inflation to change its anti-inflationary
stance. The RBI said that they are looking at the trend rather than a numerical target per
se and would like to see most indicators pointing in the same direction - i.e., lower
domestic demand and corporate margins, as well as the momentum in core mfg. inflation
(i.e., sa month on month trends). The RBI also mentioned that though it has seen some
moderation in corporate margins in its early sample of June quarterly earnings results,
the evidence so far only suggests moderate pressure on margins, and it will wait for more
data to fully form its view (i.e., wait for all the results to come in). The RBI also suggested
that it may provide projections for core manufacturing inflation in the future, thought it does
remain a work in progress.
Don't expect a change in policy stance in September
Response to a question on the timing of rate hikes - why not 50 bp in June rather than 25 bp
when a number of the upside inflation risks had already materialized - increased certainty on
retail fuel price hikes, a firming in global commodity prices, and the perceived persistence of
core manufacturing inflation? The RBI mentioned that it is still relatively early days in the
RBI's mid quarter monetary policy review, and that the mid-quarter policy review is less
intensive than the quarterly policy review. As such, they did not have all the data to go ahead
with a 50 bp rate hike - that said, the RBI did mention that it did raise rates by 25 bp and
maintain its anti-inflationary stance in the June mid quarter policy review statement.
As such, we think that it is unlikely that the RBI will signal a change in its anti-inflationary
monetary policy stance in September - any change in policy stance is likely to happen in a
quarterly policy review (unless growth decelerates significantly below RBI's trend expectation
of 8% [lower point of range is 7.4%]).
How important is the IIP slowdown?
The IIP (Index of Industrial Production) is an important data input for the RBI. However, the
RBI frames its policy based on three buckets a) economic data, and its own models and
forecasts, b) surveys on industrial outlook, credit conditions and inflation expectations, and c)
consultations with key stakeholders. As such, given the volatility in the IIP data, and the
muted slowdown in other growth indicators (i.e., exports/imports, tax collections etc.), we don't
think the IIP data is a key determinant of RBI's policy.
Risks to banks' asset quality from higher rates?
Analysis in the RBI's June Financial Stability Review suggests that higher interest rates are
even more detrimental to banks' asset quality than a GDP growth slowdown. We asked the
RBI if it was concerned about banks' asset quality given the 475 bp of effective tightening in
policy rates. The RBI recognized it as a concern, but believes that banks need to be more
stringent in risk management as a result - the potential risk to banks' asset quality would not
lead to a reversal in its policy stance.
Tax revenue slippage due to lower growth
The RBI is not concerned about the risk of a slippage in tax collections versus revenue
targets due to its policy induced growth slowdown. RBI thinks that indirect tax collection is
linked to nominal rather than real GDP growth - with inflation being higher than expected, it
does not see downside risk to the FY12 nominal GDP growth assumption of 14% in budget
estimates. There may be some risk to direct tax collections due to lower corporate profitability
but the RBI thinks that can be offset by the better execution of tax collection by the revenue
department.
Staying bullish; de-rating so far could offset weak fundamentals at PSBs
No doubt, the continuation of RBI's anti-inflationary stance has pushed out the policy rate
peak catalyst (we could see another 25-50 bp of policy rate hikes) and increased downside
risks to growth. The market reaction reflects that, with the NIFTY Index underperforming
regional peers (in local currency terms) by 3.5% over the last two trading days. We maintain
our bullish stance as we think a) valuations remain reasonable, b) there has been a tangible
improvement in the government's policy inertia (e.g., FDI in multi-brand retail, appointment of
chairman for the GST committee), and c) though the policy rate peak has been pushed out,
we are close to a peak in interest rates. We also continue with our overweight in interest rate
sensitive names, as we think price action over the past two trading days has priced in
concerns around higher rates and lower growth. For example, the Banks NIFTY index is down
3.4% over the past two trading days, versus only a 0.4% decline in the NSE CNX IT NIFTY
index and a 2.4% decline in the NIFTY index.
We also sense an almost 180 degree turn in investor sentiment towards public sector banks
(PSBs) since October/November when clients refused to take meetings with us as we were
marketing our bearish view on the overall market and wholesale funded financial institutions.
The Banks NIFTY Index is off 17% since its 5 November 2010 peak. However, the PSBs in
the index are down 26% on average, versus only 9% for their private sector peers. We
believe that wider adoption of system based NPL recognition and additional provisions per
RBI provisioning norms exacerbated the weak core results at PSBs, and the June quarter
could potentially represent a trough in earnings (though there is downside risk to current
Bloomberg consensus estimates). That said, the key risk to a bullish investment thesis on
Indian banks (especially wholesale funded PSBs) is deterioration in asset quality given
slowing growth and the increase in interest rates. This is something we will monitor closely.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RBI's post policy call suggests that future monetary policy actions will remain data dependent
with RBI monitoring global commodity prices, domestic demand (i.e., growth) and inflation
trends. That said, we do think we are only 25-50 bp away from a peak in policy rates.
Inflation AND growth data to drive policy action going forward
RBI's post policy call with analysts earlier today suggests that RBI's future policy actions
will continue to be data driven. Apart from the inflation numbers, the RBI will monitor
global commodity prices and domestic demand as it considers these to be key drivers of
core manufacturing inflation. We got the sense that the RBI would like to see most
indicators pointing in the same direction - i.e., slowing growth and lower inflation, before
signalling a change in policy stance.
Seasonally adjusted (sa) or yoy core manufacturing inflation?
In response to a question that sa core mfg. inflation had shown significant deceleration in
the June quarter (versus the yoy trend), the RBI mentioned that May and June numbers
were based on provisional data which could be subject to upward revision - as such, it
thinks that it may be too early to draw conclusions from these numbers. We asked what
metric the RBI would focus on going forward - the sa or the yoy change in core mfg.
inflation, as core yoy mfg. inflation could stay close to 7% even though the sa numbers
could be in line with the RBI's target of 4-5%. This is important as the RBI has said that it
will look for a sustained downturn in core mfg. inflation to change its anti-inflationary
stance. The RBI said that they are looking at the trend rather than a numerical target per
se and would like to see most indicators pointing in the same direction - i.e., lower
domestic demand and corporate margins, as well as the momentum in core mfg. inflation
(i.e., sa month on month trends). The RBI also mentioned that though it has seen some
moderation in corporate margins in its early sample of June quarterly earnings results,
the evidence so far only suggests moderate pressure on margins, and it will wait for more
data to fully form its view (i.e., wait for all the results to come in). The RBI also suggested
that it may provide projections for core manufacturing inflation in the future, thought it does
remain a work in progress.
Don't expect a change in policy stance in September
Response to a question on the timing of rate hikes - why not 50 bp in June rather than 25 bp
when a number of the upside inflation risks had already materialized - increased certainty on
retail fuel price hikes, a firming in global commodity prices, and the perceived persistence of
core manufacturing inflation? The RBI mentioned that it is still relatively early days in the
RBI's mid quarter monetary policy review, and that the mid-quarter policy review is less
intensive than the quarterly policy review. As such, they did not have all the data to go ahead
with a 50 bp rate hike - that said, the RBI did mention that it did raise rates by 25 bp and
maintain its anti-inflationary stance in the June mid quarter policy review statement.
As such, we think that it is unlikely that the RBI will signal a change in its anti-inflationary
monetary policy stance in September - any change in policy stance is likely to happen in a
quarterly policy review (unless growth decelerates significantly below RBI's trend expectation
of 8% [lower point of range is 7.4%]).
How important is the IIP slowdown?
The IIP (Index of Industrial Production) is an important data input for the RBI. However, the
RBI frames its policy based on three buckets a) economic data, and its own models and
forecasts, b) surveys on industrial outlook, credit conditions and inflation expectations, and c)
consultations with key stakeholders. As such, given the volatility in the IIP data, and the
muted slowdown in other growth indicators (i.e., exports/imports, tax collections etc.), we don't
think the IIP data is a key determinant of RBI's policy.
Risks to banks' asset quality from higher rates?
Analysis in the RBI's June Financial Stability Review suggests that higher interest rates are
even more detrimental to banks' asset quality than a GDP growth slowdown. We asked the
RBI if it was concerned about banks' asset quality given the 475 bp of effective tightening in
policy rates. The RBI recognized it as a concern, but believes that banks need to be more
stringent in risk management as a result - the potential risk to banks' asset quality would not
lead to a reversal in its policy stance.
Tax revenue slippage due to lower growth
The RBI is not concerned about the risk of a slippage in tax collections versus revenue
targets due to its policy induced growth slowdown. RBI thinks that indirect tax collection is
linked to nominal rather than real GDP growth - with inflation being higher than expected, it
does not see downside risk to the FY12 nominal GDP growth assumption of 14% in budget
estimates. There may be some risk to direct tax collections due to lower corporate profitability
but the RBI thinks that can be offset by the better execution of tax collection by the revenue
department.
Staying bullish; de-rating so far could offset weak fundamentals at PSBs
No doubt, the continuation of RBI's anti-inflationary stance has pushed out the policy rate
peak catalyst (we could see another 25-50 bp of policy rate hikes) and increased downside
risks to growth. The market reaction reflects that, with the NIFTY Index underperforming
regional peers (in local currency terms) by 3.5% over the last two trading days. We maintain
our bullish stance as we think a) valuations remain reasonable, b) there has been a tangible
improvement in the government's policy inertia (e.g., FDI in multi-brand retail, appointment of
chairman for the GST committee), and c) though the policy rate peak has been pushed out,
we are close to a peak in interest rates. We also continue with our overweight in interest rate
sensitive names, as we think price action over the past two trading days has priced in
concerns around higher rates and lower growth. For example, the Banks NIFTY index is down
3.4% over the past two trading days, versus only a 0.4% decline in the NSE CNX IT NIFTY
index and a 2.4% decline in the NIFTY index.
We also sense an almost 180 degree turn in investor sentiment towards public sector banks
(PSBs) since October/November when clients refused to take meetings with us as we were
marketing our bearish view on the overall market and wholesale funded financial institutions.
The Banks NIFTY Index is off 17% since its 5 November 2010 peak. However, the PSBs in
the index are down 26% on average, versus only 9% for their private sector peers. We
believe that wider adoption of system based NPL recognition and additional provisions per
RBI provisioning norms exacerbated the weak core results at PSBs, and the June quarter
could potentially represent a trough in earnings (though there is downside risk to current
Bloomberg consensus estimates). That said, the key risk to a bullish investment thesis on
Indian banks (especially wholesale funded PSBs) is deterioration in asset quality given
slowing growth and the increase in interest rates. This is something we will monitor closely.
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