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In the mid‐quarter monetary policy review, the Reserve Bank of India
(RBI) has maintained status quo, as expected. The accompanying
statement is on the hawkish side, highlighting inflation risks. However,
inflation concerns are now emanating more from supply side (crude
prices, suppressed inflation etc) rather than the demand side where price
pressures are clearly receding. Given that investment slowdown is
deepening and core inflation easing, RBI may embark upon a rate cut
cycle in April as policy transmission happens with a significant lag.
Besides, the Union Budget 2012 is likely to bring some fiscal
consolidation, comforting RBI. The pace of rate cuts will, however,
continue to depend on evolving inflation‐growth dynamics.
Status quo, as expected
In the mid‐quarter monetary policy review, RBI has kept its policy rates and CRR
unchanged, in line with expectations. The repo rate currently stands at 8.50%, reverse
repo at 7.50% and CRR at 4.75%. The policy statement’s overall tone was hawkish, with
RBI explicitly stating that upside risks to inflation have increased. The central bank
attributed increased risks to the recent surge in crude oil prices, fiscal slippages and
rupee depreciation. Besides, it was also concerned about the significant suppressed
inflation in fuel, fertilizer and power, as administered prices do not fully reflect the
costs of production.
Importantly, key highlight of the present policy was RBI’s focus on the supply side
inflation (suppressed inflation, oil prices etc) rather than the demand side, as was the
case last year. In fact, RBI is of the view that demand pressures in the economy are
receding. This augurs well from the policy rates perspective as it was this rise in
demand pressures last year which led to a very aggressive stance from the central bank.
Moreover, RBI also acknowledged some slowdown in the economic activity by
highlighting difficulty faced by corporates in passing rising input prices.
Expect rate cuts from April
Owing to the hawkish tilt in the policy statement and specific references to the supplyside
inflationary pressures, market participants have become concerned about whether
RBI would initiate policy rate cuts from April policy or not. We believe that the RBI will
likely embark upon the rate cut cycle from April itself, as:
a) Some credible fiscal consolidation in the union budget likely: RBI, in its various
communications, has emphasized the role of fiscal slippages in amplification of
inflation. Accordingly, in its last policy statement it stated that fiscal consolidation “is
critical to yielding the space required for lowering rates”. We think as some fiscal
consolidation in the union budget is forthcoming (FY13 fiscal deficit expected to be
~5.2% of GDP vs ~5.8% of GDP in FY12), one of the important requisite for RBI to
initiate rate cut would be met.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
In the mid‐quarter monetary policy review, the Reserve Bank of India
(RBI) has maintained status quo, as expected. The accompanying
statement is on the hawkish side, highlighting inflation risks. However,
inflation concerns are now emanating more from supply side (crude
prices, suppressed inflation etc) rather than the demand side where price
pressures are clearly receding. Given that investment slowdown is
deepening and core inflation easing, RBI may embark upon a rate cut
cycle in April as policy transmission happens with a significant lag.
Besides, the Union Budget 2012 is likely to bring some fiscal
consolidation, comforting RBI. The pace of rate cuts will, however,
continue to depend on evolving inflation‐growth dynamics.
Status quo, as expected
In the mid‐quarter monetary policy review, RBI has kept its policy rates and CRR
unchanged, in line with expectations. The repo rate currently stands at 8.50%, reverse
repo at 7.50% and CRR at 4.75%. The policy statement’s overall tone was hawkish, with
RBI explicitly stating that upside risks to inflation have increased. The central bank
attributed increased risks to the recent surge in crude oil prices, fiscal slippages and
rupee depreciation. Besides, it was also concerned about the significant suppressed
inflation in fuel, fertilizer and power, as administered prices do not fully reflect the
costs of production.
Importantly, key highlight of the present policy was RBI’s focus on the supply side
inflation (suppressed inflation, oil prices etc) rather than the demand side, as was the
case last year. In fact, RBI is of the view that demand pressures in the economy are
receding. This augurs well from the policy rates perspective as it was this rise in
demand pressures last year which led to a very aggressive stance from the central bank.
Moreover, RBI also acknowledged some slowdown in the economic activity by
highlighting difficulty faced by corporates in passing rising input prices.
Expect rate cuts from April
Owing to the hawkish tilt in the policy statement and specific references to the supplyside
inflationary pressures, market participants have become concerned about whether
RBI would initiate policy rate cuts from April policy or not. We believe that the RBI will
likely embark upon the rate cut cycle from April itself, as:
a) Some credible fiscal consolidation in the union budget likely: RBI, in its various
communications, has emphasized the role of fiscal slippages in amplification of
inflation. Accordingly, in its last policy statement it stated that fiscal consolidation “is
critical to yielding the space required for lowering rates”. We think as some fiscal
consolidation in the union budget is forthcoming (FY13 fiscal deficit expected to be
~5.2% of GDP vs ~5.8% of GDP in FY12), one of the important requisite for RBI to
initiate rate cut would be met.
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