Week ended December 21, 2012 :: icici direct

Week ended December 21, 2012
Mid -Quarter Monetary Policy Review – December 2012
Birla SunLife AMC
A big positive on the inflation front has been that despite significant quantitative easing by western central banks in the last 3-4
months, commodity prices especially oil prices have remained quite range bound.
We expect WPI inflation to moderate to 6-6.5% range by Mar 2013. This moderation in inflation dynamics over the next few months
should allow RBI to finally and truly start with its rate easing cycle in Jan 2013- Something that the central bank has also hinted
quite strongly that it will focus on 'threats to growth from this point onwards' in its mid-quarter Monetary policy review, December
2012. Given our expectation of headline inflation moderating to 6.5% or below by March 2013, it is highly likely that RBI mar
positively surprise the markets by the depth and timing of its rate cuts, in order to step up its efforts to revive growth from hereon.
Overall we expect 75-100 bps of rate cuts in 2013.
Reliance AMC
Liquidity situation remains far from comfortable. With no CRR cut announced, we do expect RBI to continue with OMOs that will
support yields. Also, December month end government spending may be high as oil subsidy payments may come through. This
may help ease liquidity.
The demand-supply dynamics of bonds remain in favour of demand as we expect another Rs 600 bn of OMOs by RBI as against
some slippage in fiscal deficit and additional borrowing of around Rs 300 bn. RBI states that recent macro data are in line with its
projection and reinforces its intention to start policy easing in 4Q.  So, we expect a first Repo rate cut on 29th  Jan’13.
Expectation of rate cut as early as next month may keep sentiment positive. Most probably RBI wants to wait and see the
quantum of revision of final WPI inflation next month along with government’s fiscal situation. Till date, government has maintained
that it will achieve fiscal deficit of 5.3% of GDP and there has not been any additional borrowing announcement. By Jan end, we
may have a better idea of fiscal slippage and additional borrowing. Anyway, the good news is that RBI has shifted focus to growth
and policy rate may move south in coming months unless inflation accelerates sharply.
IDFC AMC
In this December 2012 Monetary Policy review while the commitment to ease has explicitly been made by RBI, the actual easing
has been deferred to the next quarter. This makes little practical sense to us, but it is not something that needs to be worried about.
Overall, we reiterate our view of 50 bps of repo rate cuts by March 2013. There is more than an even chance that this gets
delivered in the January policy review itself. The other big take-away from the policy is with respect to liquidity.  Liquidity is tight
currently and the RBI commits that liquidity will be managed with a view to supporting growth. This indicates that the central bank
will be quite proactive in infusing liquidity. And yet it has refrained from cutting CRR. This indicates that preference for OMOs will
continue. Indeed, as we have said before, we expect a minimum of INR 60,000 crores of OMOs till 31
st
 March (out of which INR
23,200 crores as been done till now). this makes the demand versus supply equation for the government bond curve the most
favorable between now and 31
st
 March.

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