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● The central bank’s guidance of no rate hike in Dec-11, and that
inflation would fall to 7% by Mar-12, has been widely interpreted
as a signal to buy rate-sensitives. We still believe it is too early.
● For the past year, the domestic part of inflation has remained
relatively steady (albeit at high levels), while the global part of
inflation has been strong (Fig 1). Implicit in the RBI’s expectation
of 7% by Mar-12 seems to be an assumption that global
commodity prices stay at or fall from Sep-11 end levels.
● If, however, we take global commodity prices (proxy being IMF
World Commodities Index) as of 27-Oct, and assume they stay
unchanged till Mar-12, inflation would be 7.6% and not 7% (Fig 2),
materially above the RBI’s comfort levels. With QE now occurring
again across developed markets, risks are nominal commodity
prices go up further, and a weak rupee could make things worse.
● RBI’s guidance of no rate hike in Dec-11 may also have been
driven by the lack of transmission of prior repo rate increases (Fig
3). The monetary authority is now attempting unconventional
tightening—deregulation of savings rates is the first step. We
believe a delay in open market purchases of government bonds—
widely expected by the market—could be the next such step.
RBI’s entry into the bond market is linked to liquidity and not bond
yields. In FY11, the RBI started its purchases in December, once
liquidity tightened materially, and was largely done by January. This
year, their entry could potentially be delayed.
We stay UNDERWEIGHT on financials (ICICI, SBI), and other ratesensitive
sectors such as four-wheeler autos (Maruti) and
infrastructure/construction names (BHEL).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● The central bank’s guidance of no rate hike in Dec-11, and that
inflation would fall to 7% by Mar-12, has been widely interpreted
as a signal to buy rate-sensitives. We still believe it is too early.
● For the past year, the domestic part of inflation has remained
relatively steady (albeit at high levels), while the global part of
inflation has been strong (Fig 1). Implicit in the RBI’s expectation
of 7% by Mar-12 seems to be an assumption that global
commodity prices stay at or fall from Sep-11 end levels.
● If, however, we take global commodity prices (proxy being IMF
World Commodities Index) as of 27-Oct, and assume they stay
unchanged till Mar-12, inflation would be 7.6% and not 7% (Fig 2),
materially above the RBI’s comfort levels. With QE now occurring
again across developed markets, risks are nominal commodity
prices go up further, and a weak rupee could make things worse.
● RBI’s guidance of no rate hike in Dec-11 may also have been
driven by the lack of transmission of prior repo rate increases (Fig
3). The monetary authority is now attempting unconventional
tightening—deregulation of savings rates is the first step. We
believe a delay in open market purchases of government bonds—
widely expected by the market—could be the next such step.
RBI’s entry into the bond market is linked to liquidity and not bond
yields. In FY11, the RBI started its purchases in December, once
liquidity tightened materially, and was largely done by January. This
year, their entry could potentially be delayed.
We stay UNDERWEIGHT on financials (ICICI, SBI), and other ratesensitive
sectors such as four-wheeler autos (Maruti) and
infrastructure/construction names (BHEL).
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