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India
Was this the last one? RBI hikes policy rate by 25 bps
The RBI raised the policy (repo) rate by 25 bps as expected. While voicing more concern about the global
economic backdrop and seeing downside risks to domestic growth, RBI still sees upside risks to inflation
and, therefore, decided to keep the tightening bias. However, it signalled a likely pause at the December
meeting and possibly hereafter if the upside risks to inflation do not materialize.
The RBI hiked the policy rate (the repurchase or repo rate) by 25 bps to 8.50%, in line with our call and
consensus. Consequently, the reverse repo and marginal standing facility rates were automatically adjusted
by 25 bps to 7.50% and 9.50%, respectively. The cash reserve ratio (CRR) was kept unchanged at 6%.
In addition to these measures, the RBI also presented some developmental and regulatory policies. It
announced the deregulation of bank deposit savings rates, which could increase costs for banks. The
statement also indicated that it would soon provide specific guidelines to introduce new money market
derivative instruments and allow domestic banks to open branches in smaller towns (tier 2 centres) with
little regulatory approval.
On the global backdrop, the statement noted that "global growth prospects have significantly weakened
over the past few months" due to the sovereign debt crisis in Europe and that this had added to "existing
vulnerabilities in the major advanced economies." Despite some "knock-on impact", growth in emerging
economies was seen as "resilient". In this context, the statement also voiced concerns that global
commodity prices had only seen a "small correction" despite the slowdown in global growth.
On the domestic economy, the statement sounded a more cautious note this time around, highlighting that
"...the Indian economy is clearly seeing slowing growth" due to monetary policy tightening, concerns
about elevated inflation, and global spillovers. On the supply side, the industrial sector is driving the
slowdown, while it is mainly investments on the demand side. In light of these developments, the RBI has
revised down its 2011/12 GDP growth forecast to 7.6% from 8% previously.
Turning to inflation, the statement pointed out that "inflation and inflation expectations remain high" and
that "inflation is broad-based and above the comfort level". However, it also noted that "reassuringly,
momentum indicators, particularly the de-seasonalised quarter-on-quarter headline and core inflation
measures indicate moderation."
Based on this, RBI expects that inflation will begin to decline in December 2011 and still reach 7% by
March 2012. In its forward guidance, RBI signalled a pause in December, seeing the likelihood of rate
action as "relatively low". Beyond December, further rate hikes "may not be warranted" if inflation pans
out as expected.
While the RBI still sees inflation as the dominant risk, growth risks are moving up the ranks and we are
now very close to the end of the tightening cycle, possibly already there.
While RBI's concerns about the global economic backdrop were not surprising, it sounded a distinctively
more cautious note this time around about the domestic economy, including the prospects for
investments. On investments, the concerns, however, to a large extent related to slow administrative
procedures in clearing projects and broader structural constraints.
While the statement noted glimmers of hope for the inflation trajectory in light of the recent moderation
in sequential inflation rates, it also used a lot of column space to highlight sources of upside risks to
inflation. This suggests that the RBI is still not yet fully reassured that the inflation outlook will pan out
as expected. By the way, we share the same concern.
While RBI may pause near term, the policy rate is not falling any time soon by the sound of it. For
example, the forward guidance in the policy statement only talks about a "low probability" of a hike in
December and that rate hikes "may" not be necessary thereafter. In other words, rate hikes are not yet off
the table.
Moreover, RBI also stressed in the forward guidance that lack of progress on fiscal consolidation and
structural supply-side reforms would add to medium-term inflation risks, which would then have to be
factored in when determining the monetary policy stance. In our view, the probability of slow progress in
these areas is quite high. In turn, the RBI will likely have to keep the policy rate at current levels for an
extended period, possibly until end-2012 calendar year. See also our recent piece on India, Inflation: A
jumbo-sized challenge, 21 October 2011 for more on this.
What we think: All in all, the RBI aptly did not shy away from another rate hike, continuing to stand
out from the crowd among emerging market peers. While we are now close to the
end of the tightening cycle, the policy rate will have to stay elevated for quite a while
before we can comfortably assume that inflation will slide into the comfort zone.
Leif Lybecker Eskesen (Economist) & Prithviraj Srinivas (Economics Associate, Bangalore)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India
Was this the last one? RBI hikes policy rate by 25 bps
The RBI raised the policy (repo) rate by 25 bps as expected. While voicing more concern about the global
economic backdrop and seeing downside risks to domestic growth, RBI still sees upside risks to inflation
and, therefore, decided to keep the tightening bias. However, it signalled a likely pause at the December
meeting and possibly hereafter if the upside risks to inflation do not materialize.
The RBI hiked the policy rate (the repurchase or repo rate) by 25 bps to 8.50%, in line with our call and
consensus. Consequently, the reverse repo and marginal standing facility rates were automatically adjusted
by 25 bps to 7.50% and 9.50%, respectively. The cash reserve ratio (CRR) was kept unchanged at 6%.
In addition to these measures, the RBI also presented some developmental and regulatory policies. It
announced the deregulation of bank deposit savings rates, which could increase costs for banks. The
statement also indicated that it would soon provide specific guidelines to introduce new money market
derivative instruments and allow domestic banks to open branches in smaller towns (tier 2 centres) with
little regulatory approval.
On the global backdrop, the statement noted that "global growth prospects have significantly weakened
over the past few months" due to the sovereign debt crisis in Europe and that this had added to "existing
vulnerabilities in the major advanced economies." Despite some "knock-on impact", growth in emerging
economies was seen as "resilient". In this context, the statement also voiced concerns that global
commodity prices had only seen a "small correction" despite the slowdown in global growth.
On the domestic economy, the statement sounded a more cautious note this time around, highlighting that
"...the Indian economy is clearly seeing slowing growth" due to monetary policy tightening, concerns
about elevated inflation, and global spillovers. On the supply side, the industrial sector is driving the
slowdown, while it is mainly investments on the demand side. In light of these developments, the RBI has
revised down its 2011/12 GDP growth forecast to 7.6% from 8% previously.
Turning to inflation, the statement pointed out that "inflation and inflation expectations remain high" and
that "inflation is broad-based and above the comfort level". However, it also noted that "reassuringly,
momentum indicators, particularly the de-seasonalised quarter-on-quarter headline and core inflation
measures indicate moderation."
Based on this, RBI expects that inflation will begin to decline in December 2011 and still reach 7% by
March 2012. In its forward guidance, RBI signalled a pause in December, seeing the likelihood of rate
action as "relatively low". Beyond December, further rate hikes "may not be warranted" if inflation pans
out as expected.
While the RBI still sees inflation as the dominant risk, growth risks are moving up the ranks and we are
now very close to the end of the tightening cycle, possibly already there.
While RBI's concerns about the global economic backdrop were not surprising, it sounded a distinctively
more cautious note this time around about the domestic economy, including the prospects for
investments. On investments, the concerns, however, to a large extent related to slow administrative
procedures in clearing projects and broader structural constraints.
While the statement noted glimmers of hope for the inflation trajectory in light of the recent moderation
in sequential inflation rates, it also used a lot of column space to highlight sources of upside risks to
inflation. This suggests that the RBI is still not yet fully reassured that the inflation outlook will pan out
as expected. By the way, we share the same concern.
While RBI may pause near term, the policy rate is not falling any time soon by the sound of it. For
example, the forward guidance in the policy statement only talks about a "low probability" of a hike in
December and that rate hikes "may" not be necessary thereafter. In other words, rate hikes are not yet off
the table.
Moreover, RBI also stressed in the forward guidance that lack of progress on fiscal consolidation and
structural supply-side reforms would add to medium-term inflation risks, which would then have to be
factored in when determining the monetary policy stance. In our view, the probability of slow progress in
these areas is quite high. In turn, the RBI will likely have to keep the policy rate at current levels for an
extended period, possibly until end-2012 calendar year. See also our recent piece on India, Inflation: A
jumbo-sized challenge, 21 October 2011 for more on this.
What we think: All in all, the RBI aptly did not shy away from another rate hike, continuing to stand
out from the crowd among emerging market peers. While we are now close to the
end of the tightening cycle, the policy rate will have to stay elevated for quite a while
before we can comfortably assume that inflation will slide into the comfort zone.
Leif Lybecker Eskesen (Economist) & Prithviraj Srinivas (Economics Associate, Bangalore)
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