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● RBI raised the repo rate by 25 bp as expected by the majority.
A few economists (3 of 17 surveyed by Bloomberg) expected a
pause.
● Most expected this to be the last hike of the current tightening
cycle. We are still sticking with another hike in October.
● We are looking for the first cut in the repo rate to come in early
1Q FY2012/13 (Apr-Jun) with a total of 125 bp in cuts in the
next financial year.
● RBI says inflation remains “high, generalised and much above
the comfort zone”. It noted signs of growth moderation but
continued to sound more concerned on inflation.
● In our view, input price pressures are not going away in a hurry,
particularly with the weaker INR and increase in food prices…
● But it is not very clear to us that these input price pressures will
keep getting passed on to final goods’ prices by the same force
as has been the case so far. Corporate profitability looks set to
continue to face a meaningful squeeze.
RBI raised repo rate by 25 bp
RBI raised the repo rate by 25 bp as expected by the majority. A few
economists (3 of 17 surveyed by Bloomberg) expected a pause. The
repo rate now stands at 8.25%, with the upper (lower) end of the
corridor at 9.25% (7.25%). In July, RBI had surprised by hiking the
repo rate by 50 bp instead of 25 bp.
We are sticking with an October hike
Most expected this to be the last hike. We are still sticking with
another hike in October. We will not go so far as to say that an
October hike is a foregone conclusion because in current times
prospects for global growth and market sentiment can deteriorate
rapidly. But assuming that that there is no such major negative
change globally until end October, another hike looks likely at the
stage.
Rate cuts yes, but not in a hurry
We expect the RBI to cut rates, but not in a hurry. As signs of a
slowdown become more notable towards the end of this financial year,
RBI’s stance will clearly shift gears. We are looking for the first cut in
the repo rate to come in early 1Q FY2012/13 (Apr-Jun) with a total of
125 bp in cuts during the next financial year.
RBI says inflation remains “high, generalised and much
above the comfort zone”
The official statement, although slightly less hawkish than the July
statement, outlined enough concern on inflation for us to believe that
RBI has not completed its agenda yet. Not surprisingly, the central
bank did not seem happy about the rise in its ‘core’ measure of WPI
inflation in August – WPI manufactured ex food, from 7.5% YoY July
to 7.7% YoY, as, in its judgment, this suggests “persistent demand
side pressures”. Also, RBI rightly highlighted upside to input prices
from ongoing electricity tariff revisions and still elevated global oil
prices.
RBI noted signs of growth moderation but continued to
sound more concerned on inflation
RBI acknowledged the drop in the manufacturing PMI and the
slowdown in industrial and services sector GDP. With regard to the
weak July industrial production print, as we expected, the RBI chose
to ignore the headline number and instead took comfort in the fact that
growth excluding capital goods actually picked up in July. While RBI
observed that corporate margins have moderated, it still felt that there
was evidence of “significant” pass-through of input prices in most
sectors.
In our view, input price pressures are not going away in a
hurry…
…particularly given the weaker INR. This, along with food prices that
are going up at a decent clip, are likely to keep WPI inflation elevated
at 9% plus in the next few months at least.
…But it is not very clear to us that these input price
pressures will keep getting passed on to final goods’ prices
by the same force…
…as was the case in the last few months. After all, there are signs of
growth moderating and this moderation is likely to continue. In
addition, we have highlighted repeatedly, that unfortunately, for India,
lack of data make it very difficult to judge demand-side pressures.
Even RBIs ‘core’ measure of the WPI is not a great proxy for the
demand side pressure because it is replete with a host of inputs (such
as chemicals, metals, fertilizers, etc.) rather than finished goods. What
does seem quite likely, however, is that corporate profitability looks
set to continue to face a meaningful squeeze.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● RBI raised the repo rate by 25 bp as expected by the majority.
A few economists (3 of 17 surveyed by Bloomberg) expected a
pause.
● Most expected this to be the last hike of the current tightening
cycle. We are still sticking with another hike in October.
● We are looking for the first cut in the repo rate to come in early
1Q FY2012/13 (Apr-Jun) with a total of 125 bp in cuts in the
next financial year.
● RBI says inflation remains “high, generalised and much above
the comfort zone”. It noted signs of growth moderation but
continued to sound more concerned on inflation.
● In our view, input price pressures are not going away in a hurry,
particularly with the weaker INR and increase in food prices…
● But it is not very clear to us that these input price pressures will
keep getting passed on to final goods’ prices by the same force
as has been the case so far. Corporate profitability looks set to
continue to face a meaningful squeeze.
RBI raised repo rate by 25 bp
RBI raised the repo rate by 25 bp as expected by the majority. A few
economists (3 of 17 surveyed by Bloomberg) expected a pause. The
repo rate now stands at 8.25%, with the upper (lower) end of the
corridor at 9.25% (7.25%). In July, RBI had surprised by hiking the
repo rate by 50 bp instead of 25 bp.
We are sticking with an October hike
Most expected this to be the last hike. We are still sticking with
another hike in October. We will not go so far as to say that an
October hike is a foregone conclusion because in current times
prospects for global growth and market sentiment can deteriorate
rapidly. But assuming that that there is no such major negative
change globally until end October, another hike looks likely at the
stage.
Rate cuts yes, but not in a hurry
We expect the RBI to cut rates, but not in a hurry. As signs of a
slowdown become more notable towards the end of this financial year,
RBI’s stance will clearly shift gears. We are looking for the first cut in
the repo rate to come in early 1Q FY2012/13 (Apr-Jun) with a total of
125 bp in cuts during the next financial year.
RBI says inflation remains “high, generalised and much
above the comfort zone”
The official statement, although slightly less hawkish than the July
statement, outlined enough concern on inflation for us to believe that
RBI has not completed its agenda yet. Not surprisingly, the central
bank did not seem happy about the rise in its ‘core’ measure of WPI
inflation in August – WPI manufactured ex food, from 7.5% YoY July
to 7.7% YoY, as, in its judgment, this suggests “persistent demand
side pressures”. Also, RBI rightly highlighted upside to input prices
from ongoing electricity tariff revisions and still elevated global oil
prices.
RBI noted signs of growth moderation but continued to
sound more concerned on inflation
RBI acknowledged the drop in the manufacturing PMI and the
slowdown in industrial and services sector GDP. With regard to the
weak July industrial production print, as we expected, the RBI chose
to ignore the headline number and instead took comfort in the fact that
growth excluding capital goods actually picked up in July. While RBI
observed that corporate margins have moderated, it still felt that there
was evidence of “significant” pass-through of input prices in most
sectors.
In our view, input price pressures are not going away in a
hurry…
…particularly given the weaker INR. This, along with food prices that
are going up at a decent clip, are likely to keep WPI inflation elevated
at 9% plus in the next few months at least.
…But it is not very clear to us that these input price
pressures will keep getting passed on to final goods’ prices
by the same force…
…as was the case in the last few months. After all, there are signs of
growth moderating and this moderation is likely to continue. In
addition, we have highlighted repeatedly, that unfortunately, for India,
lack of data make it very difficult to judge demand-side pressures.
Even RBIs ‘core’ measure of the WPI is not a great proxy for the
demand side pressure because it is replete with a host of inputs (such
as chemicals, metals, fertilizers, etc.) rather than finished goods. What
does seem quite likely, however, is that corporate profitability looks
set to continue to face a meaningful squeeze.
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