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RBI hiked the repo and reverse repo rate by 25 bp today in its mid quarter policy review (in line
with consensus expectations) and signalled an end to its monetary tightening.
RBI hiked policy rates by 25 bp today, in line with consensus expectations
The RBI earlier today in its quarterly monetary policy review for October hiked both the repo
rate (to 8.50%) and the reverse repo rate (to 7.50%) by 25 bp. This hike was in line with
consensus expectations; RBS’s economics team was expecting a pause.
The cash reserve ratio (CRR) was maintained at 6.0% of scheduled banks’ net demand and
time liabilities.
The RBI has now hiked policy rates 13 times commencing its monetary tightening in early
2010, arguably the most aggressive monetary tightening on the planet. The repo rate has
been raised by a cumulative 375 basis points, while the reverse repo rate has been raised by
a cumulative 425 basis points. The effective increase in the policy rate has been 525 basis
points, as the effective policy rate transitions to the repo rate (in a tight monetary
environment) from the reverse repo rate (in a loose monetary environment).
RBI downgrades FY12 GDP growth projection to 7.6% from 8.0%
RBI had highlighted the increased downside risks to its July forecast of 8.0% GDP growth for
FY12 in its macroeconomic review released yesterday linked to tighter monetary policy and
the worsening global environment. RBI's new FY12 GDP growth forecast is in line with its
latest survey of professional forecasters.
Inflation forecast maintained at 7.0% for March 2012
Though the level and persistence of inflation (on a yoy basis) remain a concern for the RBI, it
recognised that seasonally adjusted indicators suggest a decline in the inflation momentum.
We have been highlighting that core manufacturing inflation on a seasonally adjusted basis
peaked in March (refer “SA core inflation in RBI’s comfort zone” dated 14 September 2011 for
details).
In line with our inflation trajectory (and consensus too), RBI expects yoy WPI inflation to stay
high through November and decline in December 2011. The RBI expects inflation to
moderate further in the first half of FY13.
No rate hike in December and beyond if inflation in line with projections
The RBI stated in the policy review that the likelihood of a rate action in the December midquarter
review is relatively low even though the yoy WPI inflation print for November (to be
released in December) is expected to stay high.
More importantly, the review states that further rate hikes may not be warranted if the inflation
trajectory conforms to projections (yoy WPI moderating to 7% by March 2012 and further
moderating in first half of FY13). We think that the WPI inflation trajectory could potentially
under-shoot the RBI’s projection of 7% by March 2012 (refer “SA core inflation in RBI’s
comfort zone” dated 14 September 2011 for details).
Rate cuts on the cards?
The policy statement states that the expected moderation in inflation “should provide some
room for monetary policy to address growth risks in the short run”. As such, we think the RBI
may look to cut rates in the first quarter of FY13 if inflation moderates (in line with
expectations) and GDP growth slips significantly below trend.
More importantly, in addition to containing inflation and anchoring inflation expectations, RBI
expects its monetary policy action and guidance to “stimulate investment activity to support
raising the trend growth”. This is a significant change from the inflation focussed outcomes in
the July 26 monetary policy. The RBI in its macroeconomic review yesterday had cited
concerns that the ongoing investment slowdown could impact demand in FY13.
Savings rate deregulated
The RBI has decided to deregulate the savings bank deposit interest rate with immediate
effect; banks are free to determine their savings bank deposit interest rate, subject to the
following two conditions: (i) First, each bank will have to offer a uniform interest rate on
savings bank deposits up to Rs 0.1mn, irrespective of the amount in the account within this
limit. (ii) Second, for savings bank deposits over Rs 0.1mn, a bank may provide differential
rates of interest, if it so chooses. However, there should not be any discrimination from
customer to customer on interest rates for similar amount of deposit.
RBS banks' analysts think that a material shift in savings deposits market share is unlikely as
long as the large banks do not participate in a price war (similar to SBI’s ‘teaser’ rate
mortgage scheme). The average balance in a savings account is about Rs25,000 and thus is
way below the limit of Rs0.1mn - where differential pricing is applicable. (refer "Opportunity
amid challenges" dated July 26, 2011). However, due to competitive dynamics the average
cost of funds will increase across the industry.
Our model portfolio is overweight wholesale funded banks and financials (Power Finance,
Canara Bank, Yes Bank); these banks/financials’ cost of funds should be less impacted
versus banks with high CASA (current and savings accounts) ratios.
Staying bullish markets as interest rates have peaked
We think the MSCI India could return 20%-plus from current levels over the next 12 months.
Concerns about inflation and slowing growth seem well recognised and priced in, and the
monetary policy-tightening cycle has ended, in our view. Valuations have moderated and now
appear to be at a discount to fair value. The MSCI India is now trading at about 13x 12M
forward PE on RBS top-down estimates, a discount to its historical 10-year average of about
14-15x. We also think that though the reforms momentum seems stalled, it could surprise
versus low expectations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RBI hiked the repo and reverse repo rate by 25 bp today in its mid quarter policy review (in line
with consensus expectations) and signalled an end to its monetary tightening.
RBI hiked policy rates by 25 bp today, in line with consensus expectations
The RBI earlier today in its quarterly monetary policy review for October hiked both the repo
rate (to 8.50%) and the reverse repo rate (to 7.50%) by 25 bp. This hike was in line with
consensus expectations; RBS’s economics team was expecting a pause.
The cash reserve ratio (CRR) was maintained at 6.0% of scheduled banks’ net demand and
time liabilities.
The RBI has now hiked policy rates 13 times commencing its monetary tightening in early
2010, arguably the most aggressive monetary tightening on the planet. The repo rate has
been raised by a cumulative 375 basis points, while the reverse repo rate has been raised by
a cumulative 425 basis points. The effective increase in the policy rate has been 525 basis
points, as the effective policy rate transitions to the repo rate (in a tight monetary
environment) from the reverse repo rate (in a loose monetary environment).
RBI downgrades FY12 GDP growth projection to 7.6% from 8.0%
RBI had highlighted the increased downside risks to its July forecast of 8.0% GDP growth for
FY12 in its macroeconomic review released yesterday linked to tighter monetary policy and
the worsening global environment. RBI's new FY12 GDP growth forecast is in line with its
latest survey of professional forecasters.
Inflation forecast maintained at 7.0% for March 2012
Though the level and persistence of inflation (on a yoy basis) remain a concern for the RBI, it
recognised that seasonally adjusted indicators suggest a decline in the inflation momentum.
We have been highlighting that core manufacturing inflation on a seasonally adjusted basis
peaked in March (refer “SA core inflation in RBI’s comfort zone” dated 14 September 2011 for
details).
In line with our inflation trajectory (and consensus too), RBI expects yoy WPI inflation to stay
high through November and decline in December 2011. The RBI expects inflation to
moderate further in the first half of FY13.
No rate hike in December and beyond if inflation in line with projections
The RBI stated in the policy review that the likelihood of a rate action in the December midquarter
review is relatively low even though the yoy WPI inflation print for November (to be
released in December) is expected to stay high.
More importantly, the review states that further rate hikes may not be warranted if the inflation
trajectory conforms to projections (yoy WPI moderating to 7% by March 2012 and further
moderating in first half of FY13). We think that the WPI inflation trajectory could potentially
under-shoot the RBI’s projection of 7% by March 2012 (refer “SA core inflation in RBI’s
comfort zone” dated 14 September 2011 for details).
Rate cuts on the cards?
The policy statement states that the expected moderation in inflation “should provide some
room for monetary policy to address growth risks in the short run”. As such, we think the RBI
may look to cut rates in the first quarter of FY13 if inflation moderates (in line with
expectations) and GDP growth slips significantly below trend.
More importantly, in addition to containing inflation and anchoring inflation expectations, RBI
expects its monetary policy action and guidance to “stimulate investment activity to support
raising the trend growth”. This is a significant change from the inflation focussed outcomes in
the July 26 monetary policy. The RBI in its macroeconomic review yesterday had cited
concerns that the ongoing investment slowdown could impact demand in FY13.
Savings rate deregulated
The RBI has decided to deregulate the savings bank deposit interest rate with immediate
effect; banks are free to determine their savings bank deposit interest rate, subject to the
following two conditions: (i) First, each bank will have to offer a uniform interest rate on
savings bank deposits up to Rs 0.1mn, irrespective of the amount in the account within this
limit. (ii) Second, for savings bank deposits over Rs 0.1mn, a bank may provide differential
rates of interest, if it so chooses. However, there should not be any discrimination from
customer to customer on interest rates for similar amount of deposit.
RBS banks' analysts think that a material shift in savings deposits market share is unlikely as
long as the large banks do not participate in a price war (similar to SBI’s ‘teaser’ rate
mortgage scheme). The average balance in a savings account is about Rs25,000 and thus is
way below the limit of Rs0.1mn - where differential pricing is applicable. (refer "Opportunity
amid challenges" dated July 26, 2011). However, due to competitive dynamics the average
cost of funds will increase across the industry.
Our model portfolio is overweight wholesale funded banks and financials (Power Finance,
Canara Bank, Yes Bank); these banks/financials’ cost of funds should be less impacted
versus banks with high CASA (current and savings accounts) ratios.
Staying bullish markets as interest rates have peaked
We think the MSCI India could return 20%-plus from current levels over the next 12 months.
Concerns about inflation and slowing growth seem well recognised and priced in, and the
monetary policy-tightening cycle has ended, in our view. Valuations have moderated and now
appear to be at a discount to fair value. The MSCI India is now trading at about 13x 12M
forward PE on RBS top-down estimates, a discount to its historical 10-year average of about
14-15x. We also think that though the reforms momentum seems stalled, it could surprise
versus low expectations.
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