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After positively surprising with a CRR cut pre-policy, the RBI has acted along expected
lines by keeping rates unchanged at its mid-quarter policy review. If growth was the
highlight of the previous policy, inflation has made a comeback of sorts in the current
commentary. The central bank reconfirmed that the tightening cycle is out of the way
given growth-inflation dynamics and lowering rates would be the next step.
However, upside risks to inflation would dictate the initiation of the rate cut cycle
and the FY13 rate cycle trajectory. This stance once again circles back to the RBI’s
much desired realistic fiscal consolidation road map from the Union Budget
tomorrow. We too look forward to credible measures aimed at limiting fiscal
slippage to ~5.2% of GDP, which might provide the necessary comfort to lower rates
at the next annual policy review on April 17.
We view this policy commentary as timely in the sense that it highlights the issues
that can reappear and consequently tones down the expectation of an accelerated
monetary easing regime. At the same time, it has maintained the undertone of
dovishness and the imperative to revive the investment cycle. The government’s role
in keeping borrowing and inflation in check by bringing about fiscal discipline would
be crucial to the timing and magnitude of rate cuts in the next fiscal.
Imported, Suppressed inflation could be the spoiler
As highlighted in our previous notes, though inflation trajectory has been on preferred
lines, the RBI continues to be concerned on surging crude prices and its follow-on
effect on imported inflation and the currency. This raises the possibility of further
strain in Current Account Deficit financing in the light of exports growth slowing much
more than imports. Moreover, there is substantial suppressed inflation in the system
as regulated components like fuel, fertilizer and power have not seen price hikes in
sync with the rising production costs. The government is expected to move on one or
more of these in an effort to curb fiscal slippage and this can push inflation above
comfort levels.
Liquidity expected to ease in coming weeks
After 2 CRR cuts totaling 125bps, the RBI expects liquidity to ease in coming weeks
which might be on the back of advance tax outflow pressure receding. However, a
front-loaded borrowing schedule in FY13 means that the market will be expecting
OMO driven liquidity infusion to cushion the G-Sec supply. The RBI has not mentioned
anything on the OMO program in today’s commentary and visibility on this front will
influence the liquidity situation, in addition to any further need to repeat forex
intervention if rupee depreciation were to make a comeback.
Q4 Growth expected to be better than Q3
The central bank expects Q4 to be better than Q3 in terms of growth and other
economic indicators, while maintaining the revised FY12 GDP growth target of 6.9%. In
addition, it has acknowledged the recent volatility in IIP numbers and hence the need
to fall back on multiple indicators to assess the industrial progress.
Market reaction & near-term outlook
It has been a volatile week for bond yields with strong reactions to each of the data
releases – the strong IIP growth spiking yields at first and then softening core inflation
resulting in a rally yesterday. The reaction to the RBI commentary on inflation today
has been quite negative as yields have jumped by 8-10 bps. The market seems to be
worried on two fronts: inflation posing a threat to early rate cuts and lack of bold
measures in the Budget. We are of the view that an in-line budget can help calm the
sentiment and reverse the recent losses – however movement from there on is likely
to be range-bound with a close eye on the inflation risks that the RBI has underlined
today.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
After positively surprising with a CRR cut pre-policy, the RBI has acted along expected
lines by keeping rates unchanged at its mid-quarter policy review. If growth was the
highlight of the previous policy, inflation has made a comeback of sorts in the current
commentary. The central bank reconfirmed that the tightening cycle is out of the way
given growth-inflation dynamics and lowering rates would be the next step.
However, upside risks to inflation would dictate the initiation of the rate cut cycle
and the FY13 rate cycle trajectory. This stance once again circles back to the RBI’s
much desired realistic fiscal consolidation road map from the Union Budget
tomorrow. We too look forward to credible measures aimed at limiting fiscal
slippage to ~5.2% of GDP, which might provide the necessary comfort to lower rates
at the next annual policy review on April 17.
We view this policy commentary as timely in the sense that it highlights the issues
that can reappear and consequently tones down the expectation of an accelerated
monetary easing regime. At the same time, it has maintained the undertone of
dovishness and the imperative to revive the investment cycle. The government’s role
in keeping borrowing and inflation in check by bringing about fiscal discipline would
be crucial to the timing and magnitude of rate cuts in the next fiscal.
Imported, Suppressed inflation could be the spoiler
As highlighted in our previous notes, though inflation trajectory has been on preferred
lines, the RBI continues to be concerned on surging crude prices and its follow-on
effect on imported inflation and the currency. This raises the possibility of further
strain in Current Account Deficit financing in the light of exports growth slowing much
more than imports. Moreover, there is substantial suppressed inflation in the system
as regulated components like fuel, fertilizer and power have not seen price hikes in
sync with the rising production costs. The government is expected to move on one or
more of these in an effort to curb fiscal slippage and this can push inflation above
comfort levels.
Liquidity expected to ease in coming weeks
After 2 CRR cuts totaling 125bps, the RBI expects liquidity to ease in coming weeks
which might be on the back of advance tax outflow pressure receding. However, a
front-loaded borrowing schedule in FY13 means that the market will be expecting
OMO driven liquidity infusion to cushion the G-Sec supply. The RBI has not mentioned
anything on the OMO program in today’s commentary and visibility on this front will
influence the liquidity situation, in addition to any further need to repeat forex
intervention if rupee depreciation were to make a comeback.
Q4 Growth expected to be better than Q3
The central bank expects Q4 to be better than Q3 in terms of growth and other
economic indicators, while maintaining the revised FY12 GDP growth target of 6.9%. In
addition, it has acknowledged the recent volatility in IIP numbers and hence the need
to fall back on multiple indicators to assess the industrial progress.
Market reaction & near-term outlook
It has been a volatile week for bond yields with strong reactions to each of the data
releases – the strong IIP growth spiking yields at first and then softening core inflation
resulting in a rally yesterday. The reaction to the RBI commentary on inflation today
has been quite negative as yields have jumped by 8-10 bps. The market seems to be
worried on two fronts: inflation posing a threat to early rate cuts and lack of bold
measures in the Budget. We are of the view that an in-line budget can help calm the
sentiment and reverse the recent losses – however movement from there on is likely
to be range-bound with a close eye on the inflation risks that the RBI has underlined
today.
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