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The Reserve Bank of India raises key rates by 25 bp
The Reserve Bank of India (RBI) hiked the repo rate by 25 bp, in line with the Bloomberg
consensus expectation, while we were expecting a pause. After today’s decision, the repo rate
moves up to 8.25%, while the reverse repo rate and the marginal standing facility rate move
automatically to 7.25% and 9.25% respectively. The cash reserve ratio remains at 6.00%.
The RBI mentioned ‘downside risks’ to its GDP growth forecast of 8%. Its end-March 2012
inflation forecast remains at 7%. While recognizing risks to domestic demand, it however
cautioned that ‘inflation remains high, generalized and much above the comfort zone of the RBI’.
Our GDP growth forecast for FY12 remains at 7.3% with downside risks. We think that yoy WPI
inflation has peaked in August. Sequentially, WPI inflation continues to fall, and currently stands
at 5.7% qoq s.a. annualized in August. Our forecast for WPI inflation for end-March 2012 remains
at 6%.
The RBI mentioned that going forward, its stance ‘will be influenced by signs of downward
movement in the inflation trajectory, and the implications of global developments.’ The
arguments for the hike were backward rather than forward looking. The RBI continues to believe
that growth momentum is weakening, that inflation will fall in the second half of FY12, and that
global developments are a matter of serious concern. It cited the reason for hiking policy rates as
‘a premature change in the policy stance could harden inflationary expectations, thereby diluting
the impact of past policy actions.’
Our assessment of the rate hike is that it was unnecessary given the sharp deterioration in
the global environment and a significant slowdown in domestic activity. We think that inertia
in policy-making—once the central bank is on a tightening cycle, it is difficult for it to stop, was
probably responsible for this hike. We believe the impact of this hike will be felt only after a 2-3
quarter lag, by which time growth and inflation will have slowed considerably, and this may serve
to exacerbate the downturn. We do not think that banks will raise lending and deposit rates as a
result, as the credit-deposit ratio has continued to fall.
The RBI has left the door open for future rate hikes, as expected. We did not think that the
RBI would give a dovish statement, but make future action dependent on data. Though another
rate hike cannot be ruled out, we think that the underlying slowdown in momentum in the
economy, weakening inflationary pressures, and global headwinds make the bar for another hike
high. We continue to expect 100 bp of rate cuts in FY13.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The Reserve Bank of India raises key rates by 25 bp
The Reserve Bank of India (RBI) hiked the repo rate by 25 bp, in line with the Bloomberg
consensus expectation, while we were expecting a pause. After today’s decision, the repo rate
moves up to 8.25%, while the reverse repo rate and the marginal standing facility rate move
automatically to 7.25% and 9.25% respectively. The cash reserve ratio remains at 6.00%.
The RBI mentioned ‘downside risks’ to its GDP growth forecast of 8%. Its end-March 2012
inflation forecast remains at 7%. While recognizing risks to domestic demand, it however
cautioned that ‘inflation remains high, generalized and much above the comfort zone of the RBI’.
Our GDP growth forecast for FY12 remains at 7.3% with downside risks. We think that yoy WPI
inflation has peaked in August. Sequentially, WPI inflation continues to fall, and currently stands
at 5.7% qoq s.a. annualized in August. Our forecast for WPI inflation for end-March 2012 remains
at 6%.
The RBI mentioned that going forward, its stance ‘will be influenced by signs of downward
movement in the inflation trajectory, and the implications of global developments.’ The
arguments for the hike were backward rather than forward looking. The RBI continues to believe
that growth momentum is weakening, that inflation will fall in the second half of FY12, and that
global developments are a matter of serious concern. It cited the reason for hiking policy rates as
‘a premature change in the policy stance could harden inflationary expectations, thereby diluting
the impact of past policy actions.’
Our assessment of the rate hike is that it was unnecessary given the sharp deterioration in
the global environment and a significant slowdown in domestic activity. We think that inertia
in policy-making—once the central bank is on a tightening cycle, it is difficult for it to stop, was
probably responsible for this hike. We believe the impact of this hike will be felt only after a 2-3
quarter lag, by which time growth and inflation will have slowed considerably, and this may serve
to exacerbate the downturn. We do not think that banks will raise lending and deposit rates as a
result, as the credit-deposit ratio has continued to fall.
The RBI has left the door open for future rate hikes, as expected. We did not think that the
RBI would give a dovish statement, but make future action dependent on data. Though another
rate hike cannot be ruled out, we think that the underlying slowdown in momentum in the
economy, weakening inflationary pressures, and global headwinds make the bar for another hike
high. We continue to expect 100 bp of rate cuts in FY13.
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