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The RBI’s midyear policy is scheduled for 25
October, and it is poised to hike rates for the
thirteenth time. RBI has so far raised policy rates
effectively by 500bp since early 2010. However, at
9.7% YoY in September, WPI inflation remains
stubbornly high, although one relative positive is that
it is not worsening. Overall, the policy outcome is
less certain this time, and the possibility of RBI
holding fire cannot be totally ruled out. The
deterioration in the global backdrop, the palpable
deceleration in India’s growth momentum and its
implications for FY13 growth, expectations of
inflation rolling over from December onwards, and
the slowdown in incremental loan growth could stay
RBI’s hand.
As we have repeatedly pointed out, India’s
inflationary pressures are a complex mix of demandand
supply-side factors, cover food and non-food
categories, and are structural and cyclical in nature.
As in the previous cycle, global commodity prices
have also been a very important contributor to
inflation in the current cycle. Monetary tightening has
been necessary to moderate aggregate demand,
especially in the context of the embarrassingly poor
supply response. Still, fiscal laxity has compromised
the effectiveness of monetary tightening and forced
RBI to hike more than what it might have done if the
government were not scoring own goals.
Apart from the action on rates, RBI is likely to finally
cut its FY12 GDP growth forecast of 8% (CLSA:
7.3%). Its revised forecast will probably be 7.5%,
with the lower end of the fan chart at 7%. It will
likely retain its March 2012 WPI inflation forecast of
7% (CLSA: 7.5%). Unfortunately, RBI will avoid
offering any guidance on the outlook for FY13
growth and inflation.
Our inflation trajectory shows WPI inflation will
remain around September’s 9.7% range in October
and November, before easing in December and then
softening more appreciably in calendar 1Q12, to
7.5% by March 2012. The disclaimer about the
uncertain timing and magnitude of upward revision
in local administered prices and the impact on the
inflation trajectory remains in place.
In terms of guidance, RBI is unlikely to categorically
signal that it is done with tightening, even if this
eventually turns out to be the case. The key question
that will decide the action on 25 October is whether
RBI is willing to see through the stabilising – but still
elevated – inflation readings for October and
November to focus on the softening expected in
December. A rate hike on 25 October will not affect
the inflation outcome for October and November, and
inflation is poised to come off in December and more
meaningfully in 1Q12. Thus, while RBI’s body
language suggests that it is likely to hike, there are
some valid reasons why it could hold fire, especially
since the rate hike will hurt growth when inflation
will be coming off early next year.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The RBI’s midyear policy is scheduled for 25
October, and it is poised to hike rates for the
thirteenth time. RBI has so far raised policy rates
effectively by 500bp since early 2010. However, at
9.7% YoY in September, WPI inflation remains
stubbornly high, although one relative positive is that
it is not worsening. Overall, the policy outcome is
less certain this time, and the possibility of RBI
holding fire cannot be totally ruled out. The
deterioration in the global backdrop, the palpable
deceleration in India’s growth momentum and its
implications for FY13 growth, expectations of
inflation rolling over from December onwards, and
the slowdown in incremental loan growth could stay
RBI’s hand.
As we have repeatedly pointed out, India’s
inflationary pressures are a complex mix of demandand
supply-side factors, cover food and non-food
categories, and are structural and cyclical in nature.
As in the previous cycle, global commodity prices
have also been a very important contributor to
inflation in the current cycle. Monetary tightening has
been necessary to moderate aggregate demand,
especially in the context of the embarrassingly poor
supply response. Still, fiscal laxity has compromised
the effectiveness of monetary tightening and forced
RBI to hike more than what it might have done if the
government were not scoring own goals.
Apart from the action on rates, RBI is likely to finally
cut its FY12 GDP growth forecast of 8% (CLSA:
7.3%). Its revised forecast will probably be 7.5%,
with the lower end of the fan chart at 7%. It will
likely retain its March 2012 WPI inflation forecast of
7% (CLSA: 7.5%). Unfortunately, RBI will avoid
offering any guidance on the outlook for FY13
growth and inflation.
Our inflation trajectory shows WPI inflation will
remain around September’s 9.7% range in October
and November, before easing in December and then
softening more appreciably in calendar 1Q12, to
7.5% by March 2012. The disclaimer about the
uncertain timing and magnitude of upward revision
in local administered prices and the impact on the
inflation trajectory remains in place.
In terms of guidance, RBI is unlikely to categorically
signal that it is done with tightening, even if this
eventually turns out to be the case. The key question
that will decide the action on 25 October is whether
RBI is willing to see through the stabilising – but still
elevated – inflation readings for October and
November to focus on the softening expected in
December. A rate hike on 25 October will not affect
the inflation outcome for October and November, and
inflation is poised to come off in December and more
meaningfully in 1Q12. Thus, while RBI’s body
language suggests that it is likely to hike, there are
some valid reasons why it could hold fire, especially
since the rate hike will hurt growth when inflation
will be coming off early next year.
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