Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Market Strategy ------------------------------------------------------------------------------------------
A question of credibility: RBI hikes rates again
● RBI again raised rates by 50 bp today: cumulative hikes since
Mar-10 are now 325 bp with nary an impact on inflation. We
continue to believe that in absence of reforms/fiscal prudence, the
RBI may struggle to control inflation on its own (see our note).
● This move and the governor’s speech underlined the RBI’s
commitment to maintaining its credibility (something we had
questioned in our note). They also state that if the government
does not act towards removing some bottlenecks or by controlling
the deficit, stronger monetary policy actions would be required.
● It was interesting to see the RBI governor focusing on anchoring
inflation expectations to the 4-4.5% range and maintaining a
medium-term target of 3%. Several investors we met recently
have questioned if RBI would stop if inflation stabilised at 7%. We
don’t think RBI would be happy with that.
● RBI sees moderation in growth in some rate-sensitive sectors, but
still expects FY12 GDP growth at 8%. They cut credit growth
targets (19% to 18%), and believe fiscal deficit targets are unlikely
to be met. The stance on inflation versus growth was rather
hawkish.
Will the rate hike work?
RBI has raised repo rate yet again by 50 bp today. With this hike, the
rates have been increased by 325 bp since March 2010. However,
inflation has been at steadily high levels in the period. This is in line
with the observations we made in our report “Inflation – Is closing
one…” that in 75 years of its existence, there is little evidence to
suggest that RBI can bring down inflation on its own. Inflation is India
is more a fiscal phenomenon and will remain high as long as deficits
and their consequent monetisation remain high.
A question of credibility
It can be a serious issue if any monetary authority is seen to be
unable to control inflation. What we found most striking in the RBI
governor’s speech was his remark that they want policy actions to 1)
maintain the credibility of the commitment of monetary policy to
controlling inflation, thereby keeping medium-term inflation
expectations anchored; and in a veiled hint at government inaction: 2)
in absence of complementary policy responses on both demand
and supply sides, stronger monetary policy actions are required.
Still expecting 4-4.5% inflation as “normal”
Several investors we have had discussions with have asked if the RBI
would stop if inflation rates were to stay constant at 7-8%. In addition
to showing the inefficacy of monetary policy alone in controlling
inflation, Fig 1 also shows that the RBI would not stop. Further, the
governor mentioned that inflation expectations needed to remain
anchored at 4-4.5%, and that medium-term inflation expectations
need to be at 3% for better integration with the global economy. We
do not think “stable 7%” would be acceptable to the RBI.
Other key takeaways
● Growth versus inflation: RBI sees moderation in growth in some
rate-sensitive sectors, but sees companies still have pricing
power, pointing to steadily high non-food core inflation (see Fig 2).
● Deficits and inflation: RBI believes there is still an element of
suppressed inflation in the economy, and pointed to the Rs1 tn of
under-recoveries (1% of GDP) on oil. Regardless of how this is
handled, it believes this will be inflationary (we addressed this on
Page 13 of our note on Inflation).
● Changes in RBI expectations: Mar-12 inflation to be 7% versus
6% earlier. FY12 GDP growth unchanged at 8%. Fears that fiscal
deficit target might not be met. FY12 3M growth at 15.5% versus
16% earlier – tightening stance to continue. Non-food bank credit
growth to be 18% versus 19% earlier.
We still continue to believe that rate hikes are only a signalling
mechanism in India, and they will not impact inflation in a meaningful
way unless the structural factors driving inflation are managed through
reforms or fiscal prudence. This has been reinforced by RBI’s
statements in its policy document. which sound very similar to our
observations in the report “Inflation – Is closing one tap enough?
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Market Strategy ------------------------------------------------------------------------------------------
A question of credibility: RBI hikes rates again
● RBI again raised rates by 50 bp today: cumulative hikes since
Mar-10 are now 325 bp with nary an impact on inflation. We
continue to believe that in absence of reforms/fiscal prudence, the
RBI may struggle to control inflation on its own (see our note).
● This move and the governor’s speech underlined the RBI’s
commitment to maintaining its credibility (something we had
questioned in our note). They also state that if the government
does not act towards removing some bottlenecks or by controlling
the deficit, stronger monetary policy actions would be required.
● It was interesting to see the RBI governor focusing on anchoring
inflation expectations to the 4-4.5% range and maintaining a
medium-term target of 3%. Several investors we met recently
have questioned if RBI would stop if inflation stabilised at 7%. We
don’t think RBI would be happy with that.
● RBI sees moderation in growth in some rate-sensitive sectors, but
still expects FY12 GDP growth at 8%. They cut credit growth
targets (19% to 18%), and believe fiscal deficit targets are unlikely
to be met. The stance on inflation versus growth was rather
hawkish.
Will the rate hike work?
RBI has raised repo rate yet again by 50 bp today. With this hike, the
rates have been increased by 325 bp since March 2010. However,
inflation has been at steadily high levels in the period. This is in line
with the observations we made in our report “Inflation – Is closing
one…” that in 75 years of its existence, there is little evidence to
suggest that RBI can bring down inflation on its own. Inflation is India
is more a fiscal phenomenon and will remain high as long as deficits
and their consequent monetisation remain high.
A question of credibility
It can be a serious issue if any monetary authority is seen to be
unable to control inflation. What we found most striking in the RBI
governor’s speech was his remark that they want policy actions to 1)
maintain the credibility of the commitment of monetary policy to
controlling inflation, thereby keeping medium-term inflation
expectations anchored; and in a veiled hint at government inaction: 2)
in absence of complementary policy responses on both demand
and supply sides, stronger monetary policy actions are required.
Still expecting 4-4.5% inflation as “normal”
Several investors we have had discussions with have asked if the RBI
would stop if inflation rates were to stay constant at 7-8%. In addition
to showing the inefficacy of monetary policy alone in controlling
inflation, Fig 1 also shows that the RBI would not stop. Further, the
governor mentioned that inflation expectations needed to remain
anchored at 4-4.5%, and that medium-term inflation expectations
need to be at 3% for better integration with the global economy. We
do not think “stable 7%” would be acceptable to the RBI.
Other key takeaways
● Growth versus inflation: RBI sees moderation in growth in some
rate-sensitive sectors, but sees companies still have pricing
power, pointing to steadily high non-food core inflation (see Fig 2).
● Deficits and inflation: RBI believes there is still an element of
suppressed inflation in the economy, and pointed to the Rs1 tn of
under-recoveries (1% of GDP) on oil. Regardless of how this is
handled, it believes this will be inflationary (we addressed this on
Page 13 of our note on Inflation).
● Changes in RBI expectations: Mar-12 inflation to be 7% versus
6% earlier. FY12 GDP growth unchanged at 8%. Fears that fiscal
deficit target might not be met. FY12 3M growth at 15.5% versus
16% earlier – tightening stance to continue. Non-food bank credit
growth to be 18% versus 19% earlier.
We still continue to believe that rate hikes are only a signalling
mechanism in India, and they will not impact inflation in a meaningful
way unless the structural factors driving inflation are managed through
reforms or fiscal prudence. This has been reinforced by RBI’s
statements in its policy document. which sound very similar to our
observations in the report “Inflation – Is closing one tap enough?
No comments:
Post a Comment