Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Economics-------------------------------------------------------------------------------------------------
RBI policy: clearly hawkish and not done yet!
● RBI surprised the consensus and ourselves by hiking rates by 50
bps and not 25 bps. This action takes the repo rate to 8% which
is the level at which most analysts expected the current
tightening cycle to end at.
● We doubt that today’s move marks the end of RBI’s tightening
cycle; we now expect another 50 bps in hikes.
● RBI has raised its end-year (March 2012) WPI inflation projection
to 7% from 6%.
● RBI’s new-found aggression is alas a bit belated, in our view.
RBI surprised by hiking rates by 50 bps and not 25 bps
This action takes the repo rate to 8% which is the level at which most
analysts expected the current tightening cycle to end at. We would
highlighted that risks to our expectation of another total 50 bps in
hikes was to the upside. Clearly, this risk has materialised.
We now expect another 50 bps in hikes
We doubt that today’s action marks the end of the rate hike cycle. The
additional 50 bps that we now expect would take the repo rate to
8.50% from 8.0% now.These hikes are most likely to be delivered by
the end of the next two policy meetings.
RBI has raised its end-year WPI inflation projection to 7%
from 6%
That’s for the financial year, that is, ending March 2012. This
projection suggests a path which ultimately builds in a moderation
from current WPI inflation readings of over 9% YoY. This seems like a
reasonable assumption given favourable base effects that are likely to
kick in in 4Q financial year 2011/12. But while WPI inflation may
moderate post December, the fact is it is likely to remain in
uncomfortable teriritory, over 9% until then. Projection aside, the
central bank continues to express clear concern about inflation with
emphasis on the fact that sustained high inflation could end up being
disruptive to medium-term growth prospects.
Isn’t RBI sounding concerned about recent signs of some
moderation in growth?
Not really. While summarising what its stance will be going ahead, on
the growth front, RBI said that the stance would be one that would
“manage the risk of growth falling significantly below trend” (italic
emphasis is our own). The way we read this, RBI is not worried if
growth slows a bit to below-trend levels. It is only if there are signs of
growth slowing sharply, that RBI would get concerned. The question
of course is what does RBI consider as trend GDP growth? We would
imagine the RBI would peg it at around 8%, which is what the central
bank has its projection for GDP growth this year (our estimate is lower
at 7.5% with risks on the downside). In our view, RBI is suggesting
that it is willing to accept some signs of slowing growth since it sees
this as unavoidable in its ‘fight’ against high inflation.
RBI’s new-found aggression is alas a bit belated
Clearly recent near 10% YoY WPI readings have put the RBI on an
alert mode. However, signs of underlying demand pressures were
quite clear about six months ago when, in fact, global uncertainties
were slightly less than now and that is when ideally the RBI should
have hiked more aggressively. That could in turn have prevented the
need for much higher interest rates. Given the lags with which interest
rates work, these ‘extra’ rate hikes are likely to have their impact felt
more on 2012 activity where we expect GDP growth anyway at a
bottom-end of consensus 7.5%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Economics-------------------------------------------------------------------------------------------------
RBI policy: clearly hawkish and not done yet!
● RBI surprised the consensus and ourselves by hiking rates by 50
bps and not 25 bps. This action takes the repo rate to 8% which
is the level at which most analysts expected the current
tightening cycle to end at.
● We doubt that today’s move marks the end of RBI’s tightening
cycle; we now expect another 50 bps in hikes.
● RBI has raised its end-year (March 2012) WPI inflation projection
to 7% from 6%.
● RBI’s new-found aggression is alas a bit belated, in our view.
RBI surprised by hiking rates by 50 bps and not 25 bps
This action takes the repo rate to 8% which is the level at which most
analysts expected the current tightening cycle to end at. We would
highlighted that risks to our expectation of another total 50 bps in
hikes was to the upside. Clearly, this risk has materialised.
We now expect another 50 bps in hikes
We doubt that today’s action marks the end of the rate hike cycle. The
additional 50 bps that we now expect would take the repo rate to
8.50% from 8.0% now.These hikes are most likely to be delivered by
the end of the next two policy meetings.
RBI has raised its end-year WPI inflation projection to 7%
from 6%
That’s for the financial year, that is, ending March 2012. This
projection suggests a path which ultimately builds in a moderation
from current WPI inflation readings of over 9% YoY. This seems like a
reasonable assumption given favourable base effects that are likely to
kick in in 4Q financial year 2011/12. But while WPI inflation may
moderate post December, the fact is it is likely to remain in
uncomfortable teriritory, over 9% until then. Projection aside, the
central bank continues to express clear concern about inflation with
emphasis on the fact that sustained high inflation could end up being
disruptive to medium-term growth prospects.
Isn’t RBI sounding concerned about recent signs of some
moderation in growth?
Not really. While summarising what its stance will be going ahead, on
the growth front, RBI said that the stance would be one that would
“manage the risk of growth falling significantly below trend” (italic
emphasis is our own). The way we read this, RBI is not worried if
growth slows a bit to below-trend levels. It is only if there are signs of
growth slowing sharply, that RBI would get concerned. The question
of course is what does RBI consider as trend GDP growth? We would
imagine the RBI would peg it at around 8%, which is what the central
bank has its projection for GDP growth this year (our estimate is lower
at 7.5% with risks on the downside). In our view, RBI is suggesting
that it is willing to accept some signs of slowing growth since it sees
this as unavoidable in its ‘fight’ against high inflation.
RBI’s new-found aggression is alas a bit belated
Clearly recent near 10% YoY WPI readings have put the RBI on an
alert mode. However, signs of underlying demand pressures were
quite clear about six months ago when, in fact, global uncertainties
were slightly less than now and that is when ideally the RBI should
have hiked more aggressively. That could in turn have prevented the
need for much higher interest rates. Given the lags with which interest
rates work, these ‘extra’ rate hikes are likely to have their impact felt
more on 2012 activity where we expect GDP growth anyway at a
bottom-end of consensus 7.5%.
No comments:
Post a Comment