Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key Facts
‰ The RBI shocked markets by hiking the
repo rate by a bigger-than-expected 50bp.
‰ Hawkish statement emphasises that early
signs of slowdown so far insufficient.
‰ End March-2012 WPI forecast lifted to 7%
with upside bias from 6% % previously.
‰ Guidance adopts more neutral tone with
future action contingent on inflation new.
With its inflation forecasts once again being blown
off course and inflation expectations wobbling, a
hawkish RBI delivers a bigger-than-expected 50bp
rate hike. At 8%, the repo rate is now moving into the
restrictive territory that the RBI has made clear is
required to guarantee the sustained economic
slowdown necessary to knock out demand-pull
inflationary pressures. Markets and most forecasters
remain in denial over this crucial point; sub-8% GDP
growth is a necessity if inflation is to be controlled.
The RBI’s policy guidance adopts a more neutral
tone but, with inflation risks still skewed to the
upside, we target one more 25bp rate hike this year.
The Reserve Bank of India (RBI) delivered a surprise 50bp rate
hike today in a clear attempt to finally get its hands around
India’s increasingly ingrained inflation problems. Today’s
aggressive move lifts the policy rate (repo rate) to 8%;
increasingly into territory that we would regard as restrictive and
so should quicken the nascent signs of slowdown that the
economy has begun to exhibit in recent weeks.
As we have long argued, India’s inflation problem has
increasingly become a two-dimensional problem over the last
year. A structural food inflation problem has clearly emerged in
recent years as rising incomes fuel shifts in diets and rising
demand for protein sources that the supply side cannot keep
pace with at least in the short-run. However, too slack policy
settings – both monetary and especially fiscal – have seen the
economy move into overheating territory over the last year so
overlaying a cyclical demand-pull inflation on top of the
structural food price problem. As the RBI acknowledged nonfood manufacturing prices have been a key driver of WPI
inflation’s serial upward surprises this year which have once
again blown the RBI’s inflation forecasts off course. Inevitably
the central March-2012 was lifted to 7% from 6% with an
upward bias at its last policy review.
While the RBI can do little about the seemingly structural rise in
primary food price inflation, it can eradicate demand-pull
pressures by producing a sustained slowdown in the broader
economy. Key to the decision to deliver 50bp rate hike today
was likely building evidence that persistently high inflation is
jolting household and business inflation expectations and so
threatening to add an unwelcome third dimension to India’s
inflation problem. Ultimately, the basic aim of monetary policy
for any central bank is to ensure as close a correspondence as
possible between aggregate supply and demand in the
economy whilst stabilising inflation expectations. With demandpull inflationary pressure still clearly in evidence and inflation
expectations wobbling, today’s more aggressive move by the
RBI is therefore a laudable and ultimately necessary attempt by
the central bank to regain control of the inflationary situation.
A key passage in the policy review makes clear the RBI’s
intentions. In discussing its policy stance, it was noted that
‘there is no evidence of a sharp or broad-based slowdown as
yet’. The clear inference is that a ‘sharp and broad-based
slowdown’ is what the RBI now accepts that it must engineer.
With trend growth likely around 8%, GDP growth in the current
financial year (and likely FY2013 as well) will need to run below
that level for some time to remove the positive output gap that
we estimate has built up over the last 12-18 months. The risks
to the RBI’s GDP forecast of 8% therefore remain skewed
heavily to the downside. Our forecasts for FY2012 and FY2013
remain 7.6% and 7.3% respectively.
8% policy rates combined with the more effective monetary
transmission that still liquidity conditions should ensure will
probably be sufficient to generate the required growth
slowdown. The end of the RBI tightening cycle is now clearly in
sight after today’s move. The moderation in the RBI’s policy
guidance from a ‘need to persist with its anti-inflationary stance’
in June to today’s more balanced judgement that policy will
‘depend on the evolving inflation trajectory’ anticipates this.
However, as the policy review also makes clear, inflation risks –
from the progress of this year’s monsoon, to global oil prices,
the clear risk of further hikes in administered fuel and energy
prices – remain skewed to the upside. To this RBI’s list, we
would of course add the likelihood of further upward revisions to
the May and June WPI inflation data pushing current inflation
well into double-digit territory and so blowing even the central
bank’s new revised March 2012 inflation forecast off course.
With several months of nasty inflation upward surprise to come,
we continue to target a further 25bp rate hike at one of this
year’s remaining four policy meetings. Our year-end repo rate
target therefore remains 8.25%. With 2-year government bond
yields steady at c.8.20%, the bond market continues to deliver
a similar verdict. 2-year yields moving below the policy rate will
be a strong signal of the end of the tightening cycle
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key Facts
‰ The RBI shocked markets by hiking the
repo rate by a bigger-than-expected 50bp.
‰ Hawkish statement emphasises that early
signs of slowdown so far insufficient.
‰ End March-2012 WPI forecast lifted to 7%
with upside bias from 6% % previously.
‰ Guidance adopts more neutral tone with
future action contingent on inflation new.
With its inflation forecasts once again being blown
off course and inflation expectations wobbling, a
hawkish RBI delivers a bigger-than-expected 50bp
rate hike. At 8%, the repo rate is now moving into the
restrictive territory that the RBI has made clear is
required to guarantee the sustained economic
slowdown necessary to knock out demand-pull
inflationary pressures. Markets and most forecasters
remain in denial over this crucial point; sub-8% GDP
growth is a necessity if inflation is to be controlled.
The RBI’s policy guidance adopts a more neutral
tone but, with inflation risks still skewed to the
upside, we target one more 25bp rate hike this year.
The Reserve Bank of India (RBI) delivered a surprise 50bp rate
hike today in a clear attempt to finally get its hands around
India’s increasingly ingrained inflation problems. Today’s
aggressive move lifts the policy rate (repo rate) to 8%;
increasingly into territory that we would regard as restrictive and
so should quicken the nascent signs of slowdown that the
economy has begun to exhibit in recent weeks.
As we have long argued, India’s inflation problem has
increasingly become a two-dimensional problem over the last
year. A structural food inflation problem has clearly emerged in
recent years as rising incomes fuel shifts in diets and rising
demand for protein sources that the supply side cannot keep
pace with at least in the short-run. However, too slack policy
settings – both monetary and especially fiscal – have seen the
economy move into overheating territory over the last year so
overlaying a cyclical demand-pull inflation on top of the
structural food price problem. As the RBI acknowledged nonfood manufacturing prices have been a key driver of WPI
inflation’s serial upward surprises this year which have once
again blown the RBI’s inflation forecasts off course. Inevitably
the central March-2012 was lifted to 7% from 6% with an
upward bias at its last policy review.
While the RBI can do little about the seemingly structural rise in
primary food price inflation, it can eradicate demand-pull
pressures by producing a sustained slowdown in the broader
economy. Key to the decision to deliver 50bp rate hike today
was likely building evidence that persistently high inflation is
jolting household and business inflation expectations and so
threatening to add an unwelcome third dimension to India’s
inflation problem. Ultimately, the basic aim of monetary policy
for any central bank is to ensure as close a correspondence as
possible between aggregate supply and demand in the
economy whilst stabilising inflation expectations. With demandpull inflationary pressure still clearly in evidence and inflation
expectations wobbling, today’s more aggressive move by the
RBI is therefore a laudable and ultimately necessary attempt by
the central bank to regain control of the inflationary situation.
A key passage in the policy review makes clear the RBI’s
intentions. In discussing its policy stance, it was noted that
‘there is no evidence of a sharp or broad-based slowdown as
yet’. The clear inference is that a ‘sharp and broad-based
slowdown’ is what the RBI now accepts that it must engineer.
With trend growth likely around 8%, GDP growth in the current
financial year (and likely FY2013 as well) will need to run below
that level for some time to remove the positive output gap that
we estimate has built up over the last 12-18 months. The risks
to the RBI’s GDP forecast of 8% therefore remain skewed
heavily to the downside. Our forecasts for FY2012 and FY2013
remain 7.6% and 7.3% respectively.
8% policy rates combined with the more effective monetary
transmission that still liquidity conditions should ensure will
probably be sufficient to generate the required growth
slowdown. The end of the RBI tightening cycle is now clearly in
sight after today’s move. The moderation in the RBI’s policy
guidance from a ‘need to persist with its anti-inflationary stance’
in June to today’s more balanced judgement that policy will
‘depend on the evolving inflation trajectory’ anticipates this.
However, as the policy review also makes clear, inflation risks –
from the progress of this year’s monsoon, to global oil prices,
the clear risk of further hikes in administered fuel and energy
prices – remain skewed to the upside. To this RBI’s list, we
would of course add the likelihood of further upward revisions to
the May and June WPI inflation data pushing current inflation
well into double-digit territory and so blowing even the central
bank’s new revised March 2012 inflation forecast off course.
With several months of nasty inflation upward surprise to come,
we continue to target a further 25bp rate hike at one of this
year’s remaining four policy meetings. Our year-end repo rate
target therefore remains 8.25%. With 2-year government bond
yields steady at c.8.20%, the bond market continues to deliver
a similar verdict. 2-year yields moving below the policy rate will
be a strong signal of the end of the tightening cycle
No comments:
Post a Comment