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Economy
Monetary Policy
RBI – positioning for a pause? The Reserve Bank of India continued its fight against
the unrelenting inflationary pressures as it hiked the repo rate by 25 bps to 8.25%, in
line with our expectations. Further, there was no softening in RBI’s anti-inflation stance,
and rightly so, as with headline WPI at a 13-month high in August, a change in stance
could have risked diluting the impact of the past policy actions. That said, we feel that
RBI has probably started preparing the market for a pause, assuming there are no
negative surprises on inflation in the run-up to the next policy in October. We see
headline WPI to have peaked in August, and expect RBI to stay on a pause in its
October 25 policy review.
RBI retains its hawkishness as inflation is ’high, generalized and much above the comfort zone’
In the policy statement, there is ample evidence that RBI views the inflation situation as being
grave. RBI describes the current inflation situation as being ’high, generalized and much above the
comfort zone‘ – not surprising as headline WPI has been above 9% for the past 9 months and
above 8% for the past 20 months. It further adds that inflation momentum has persisted, as
reflected in the de-seasonalized sequential monthly inflation data. RBI goes a step further and
argues that an immediate relief on inflation is unlikely, as (1) food price inflation is showing no
signs of easing despite expectations of a good Kharif season. This is due to structural imbalances in
certain food products as well as higher MSP prices, (2) demand pressures remain intact with nonfood
manufacturing inflation rising to 7.7% in August from 7.5% in July, and corporate houses
still in a position to pass on higher input costs, (3) presence of suppressed inflation due to
administered electricity (some States have initiated an increase in electricity prices) and
administered fuel prices, (4) global crude oil prices remaining at firm levels despite the
deterioration in the global outlook, and (5) the recent sharp depreciation in the Indian Rupee, if
persists, could add to inflationary pressures by rising import costs.
Against this background, RBI’s hawkish tone comes as no surprise. In fact, as rightly pointed out, a
change in the stance at this juncture carries the potential risk of hardening inflationary
expectations and thus diluting the impact of the 12 rate hikes. Further, it needs to be realized that
with the fiscal side continuing to be loose enough, the burden of inflation containment is
disproportionately falling more on the monetary policy.
But, we call for a pause in the October policy
However, we now believe that RBI is conditioning the system for a pause. In the July policy, RBI
had indicated that a change in its stance would be ’motivated by signs of a sustainable
downturn in inflation‘. However, in this policy statement, the RBI indicates that its future stance
will be influenced by ’signs of downward movement in the inflation trajectory’. RBI also expects
that the impact of its past policy actions ’should now be increasingly felt in further moderation
in demand‘ and in turn reverse the inflation trajectory in the later part of FY2012E.
As per our calculations, headline WPI is likely to have peaked in August, but will remain sticky in
the above 9% plus zone till November before moderating towards 6.5-7% by end-March 2012.
With September WPI inflation likely to be lower than 9.78%, and RBI acknowledging downside
risks to its 8% growth forecasts for FY2012E, the monetary authority may find it prudent to pause
and assess the impact of its 500 bps of effective tightening since March 2010. But, RBI will keep a
very close watch on the global developments. Unlike in 2008 when oil and other commodity prices
came down sharply with the Lehman crisis, large doses of liquidity by various central banks could
prevent such a scenario now. However, heightened risk aversion may lead to the INR depreciation
bias picking up, a negative for inflation, especially the non-food manufactured variety.
Development over the next few weeks would thus be of paramount importance.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Monetary Policy
RBI – positioning for a pause? The Reserve Bank of India continued its fight against
the unrelenting inflationary pressures as it hiked the repo rate by 25 bps to 8.25%, in
line with our expectations. Further, there was no softening in RBI’s anti-inflation stance,
and rightly so, as with headline WPI at a 13-month high in August, a change in stance
could have risked diluting the impact of the past policy actions. That said, we feel that
RBI has probably started preparing the market for a pause, assuming there are no
negative surprises on inflation in the run-up to the next policy in October. We see
headline WPI to have peaked in August, and expect RBI to stay on a pause in its
October 25 policy review.
RBI retains its hawkishness as inflation is ’high, generalized and much above the comfort zone’
In the policy statement, there is ample evidence that RBI views the inflation situation as being
grave. RBI describes the current inflation situation as being ’high, generalized and much above the
comfort zone‘ – not surprising as headline WPI has been above 9% for the past 9 months and
above 8% for the past 20 months. It further adds that inflation momentum has persisted, as
reflected in the de-seasonalized sequential monthly inflation data. RBI goes a step further and
argues that an immediate relief on inflation is unlikely, as (1) food price inflation is showing no
signs of easing despite expectations of a good Kharif season. This is due to structural imbalances in
certain food products as well as higher MSP prices, (2) demand pressures remain intact with nonfood
manufacturing inflation rising to 7.7% in August from 7.5% in July, and corporate houses
still in a position to pass on higher input costs, (3) presence of suppressed inflation due to
administered electricity (some States have initiated an increase in electricity prices) and
administered fuel prices, (4) global crude oil prices remaining at firm levels despite the
deterioration in the global outlook, and (5) the recent sharp depreciation in the Indian Rupee, if
persists, could add to inflationary pressures by rising import costs.
Against this background, RBI’s hawkish tone comes as no surprise. In fact, as rightly pointed out, a
change in the stance at this juncture carries the potential risk of hardening inflationary
expectations and thus diluting the impact of the 12 rate hikes. Further, it needs to be realized that
with the fiscal side continuing to be loose enough, the burden of inflation containment is
disproportionately falling more on the monetary policy.
But, we call for a pause in the October policy
However, we now believe that RBI is conditioning the system for a pause. In the July policy, RBI
had indicated that a change in its stance would be ’motivated by signs of a sustainable
downturn in inflation‘. However, in this policy statement, the RBI indicates that its future stance
will be influenced by ’signs of downward movement in the inflation trajectory’. RBI also expects
that the impact of its past policy actions ’should now be increasingly felt in further moderation
in demand‘ and in turn reverse the inflation trajectory in the later part of FY2012E.
As per our calculations, headline WPI is likely to have peaked in August, but will remain sticky in
the above 9% plus zone till November before moderating towards 6.5-7% by end-March 2012.
With September WPI inflation likely to be lower than 9.78%, and RBI acknowledging downside
risks to its 8% growth forecasts for FY2012E, the monetary authority may find it prudent to pause
and assess the impact of its 500 bps of effective tightening since March 2010. But, RBI will keep a
very close watch on the global developments. Unlike in 2008 when oil and other commodity prices
came down sharply with the Lehman crisis, large doses of liquidity by various central banks could
prevent such a scenario now. However, heightened risk aversion may lead to the INR depreciation
bias picking up, a negative for inflation, especially the non-food manufactured variety.
Development over the next few weeks would thus be of paramount importance.
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