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RBI: One more for the road
25bp September 16 RBI repo rate hike
Repo rate Reverse repo rate
Actual: 8.25% 7.25%
Previous: 8.00% 7.00%
Consensus 8.25% 7.25%
BofA MLe: 8.25% 7.25%
Bottom line: Final Oct 25 RBI hike, unless US double dips
„ We now believe that the RBI will drag its rate hiking cycle to October 25 –
unless the US double dips – after today’s policy. In tandem, we now expect it
to cut 100bp from 75bp earlier from April. The RBI hiked 25bp today as widely
expected. In our reading, however, it seems to indicate a preference for a
pause after a hike on October 25 rather than on October 25 itself, as we had
penciled in. On our part, we can only emphasize that we see a need to cease
tightening as soon as inflation peaks off, given rising global and domestic
growth risks. Nonetheless, Gov Subbarao likely does not want to risk 'behindthe-curve' chatter by a “premature” stop at a time of 9-10% inflation. After all,
we believe that inflation will not peak off –at elevated 9% levels – till October
and the October inflation data will not be available till November 14 well after
the October 25 policy. Do read our last rate peaking report here.
Why it matters: Rates still peaking
„ We continue to believe that the Indian rate cycle is peaking with growth likely
to slip below 7.5% in 2H11 and inflation set to come off to 7% in 1Q12
(Charts 1-2). The RBI should pause after a final 25bp policy rate hike on
October 25 and cut 100bp from April on. Lending rate hikes look almost done,
and we expect a 75bp cut from the April-September 2012 busy season. The
10y will likely persist in the current 8-8.5% trading range with RBI OMO partly
offsetting our expected 1.2% of GDP fiscal deficit.
Key points: RBI guiding pause after October 25
„ The RBI today guided for a pause after a hike on October 25, in our view,
rather than on October 25 itself, as we had penciled in. The ‘expected
outcome’ of today’s monetary policy action was expectedly doved down to:
„ reinforce the impact of past policy actions to contain inflation and anchor
inflationary expectations;
„ In comparison, July 26’s proposals were extremely hawkish (to):
„ reinforce the cumulative impact of past actions on demand;
„ maintain the credibility of the commitment of monetary policy to
controlling inflation, thereby keeping medium-term inflation expectations
anchored; and
„ reinforce the point that in the absence of complementary policy
responses on both demand and supply sides, stronger monetary policy
actions are required.
„ In the guidance part, the RBI pointed out that while we are approaching the
end of the rate cycle, a premature policy pause could harden inflation
expectations. This leads us to expect that Governor Subbarao will pause after
October 25 if inflation begins to come off as we forecast. In his own words:
„ “The monetary tightening effected so far… has helped in containing
inflation and anchoring inflationary expectations… As monetary policy
operates with a lag, the cumulative impact of policy actions should now
be increasingly felt… As such, a premature change in the policy stance
could harden inflationary expectations… It is, therefore, imperative to
persist with the current anti-inflationary stance…. Going forward, the
stance will be influenced by signs of downward movement in the inflation
trajectory…”
Next up in India: Loan demand peaking off
„ India: Banking data (September 9), Wednesday, September 21, 2011
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RBI: One more for the road
25bp September 16 RBI repo rate hike
Repo rate Reverse repo rate
Actual: 8.25% 7.25%
Previous: 8.00% 7.00%
Consensus 8.25% 7.25%
BofA MLe: 8.25% 7.25%
Bottom line: Final Oct 25 RBI hike, unless US double dips
„ We now believe that the RBI will drag its rate hiking cycle to October 25 –
unless the US double dips – after today’s policy. In tandem, we now expect it
to cut 100bp from 75bp earlier from April. The RBI hiked 25bp today as widely
expected. In our reading, however, it seems to indicate a preference for a
pause after a hike on October 25 rather than on October 25 itself, as we had
penciled in. On our part, we can only emphasize that we see a need to cease
tightening as soon as inflation peaks off, given rising global and domestic
growth risks. Nonetheless, Gov Subbarao likely does not want to risk 'behindthe-curve' chatter by a “premature” stop at a time of 9-10% inflation. After all,
we believe that inflation will not peak off –at elevated 9% levels – till October
and the October inflation data will not be available till November 14 well after
the October 25 policy. Do read our last rate peaking report here.
Why it matters: Rates still peaking
„ We continue to believe that the Indian rate cycle is peaking with growth likely
to slip below 7.5% in 2H11 and inflation set to come off to 7% in 1Q12
(Charts 1-2). The RBI should pause after a final 25bp policy rate hike on
October 25 and cut 100bp from April on. Lending rate hikes look almost done,
and we expect a 75bp cut from the April-September 2012 busy season. The
10y will likely persist in the current 8-8.5% trading range with RBI OMO partly
offsetting our expected 1.2% of GDP fiscal deficit.
Key points: RBI guiding pause after October 25
„ The RBI today guided for a pause after a hike on October 25, in our view,
rather than on October 25 itself, as we had penciled in. The ‘expected
outcome’ of today’s monetary policy action was expectedly doved down to:
„ reinforce the impact of past policy actions to contain inflation and anchor
inflationary expectations;
„ In comparison, July 26’s proposals were extremely hawkish (to):
„ reinforce the cumulative impact of past actions on demand;
„ maintain the credibility of the commitment of monetary policy to
controlling inflation, thereby keeping medium-term inflation expectations
anchored; and
„ reinforce the point that in the absence of complementary policy
responses on both demand and supply sides, stronger monetary policy
actions are required.
„ In the guidance part, the RBI pointed out that while we are approaching the
end of the rate cycle, a premature policy pause could harden inflation
expectations. This leads us to expect that Governor Subbarao will pause after
October 25 if inflation begins to come off as we forecast. In his own words:
„ “The monetary tightening effected so far… has helped in containing
inflation and anchoring inflationary expectations… As monetary policy
operates with a lag, the cumulative impact of policy actions should now
be increasingly felt… As such, a premature change in the policy stance
could harden inflationary expectations… It is, therefore, imperative to
persist with the current anti-inflationary stance…. Going forward, the
stance will be influenced by signs of downward movement in the inflation
trajectory…”
Next up in India: Loan demand peaking off
„ India: Banking data (September 9), Wednesday, September 21, 2011
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