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Economy
Monetary Policy
RBI Monetary Policy – CRR cut to 5.5%, repo cuts to follow. The Reserve Bank of
India, in its Third Quarter Review, left the repo rate unchanged at 8.50% even as it
brought down the CRR by 0.50% to 5.50%. The cut in CRR will release `320 bn
starting fortnight of January 28, 2012 and enable a reduction in the structural liquidity
deficit. This will enable a reduction in the banks’ cost of funds and is also equivalent to
a monetary signal. Even as the leaning of the monetary stance is towards addressing
growth risks, the RBI considers a rate cut at this juncture as ’premature‘ on still high
inflation and also due to the upside risks to inflation. We expect the RBI to begin
reducing the repo rate only in the April 17, 2012 annual policy review.
RBI cuts CRR by 50 bps to bring down structural liquidity deficit
The RBI cut the CRR by 50 bps to 5.50% effective the fortnight beginning January 28, 2012 as the
persistence of tight liquidity conditions risked disrupting credit flow to the commercial sector,
adding to downside risks to growth. Banking system liquidity deficit has averaged `1,102 bn since
the beginning of November 2011, well above RBI’s comfort of (-)1% of NDTL, with recent peaks
being a deficit of `1,566 bn. The liquidity tightness that was being witnessed recently is definitely
structural in nature and not transitory as it has emerged out of forex intervention by the RBI and
higher currency in circulation. Surprisingly, the liquidity deficit has persisted despite the RBI
injecting Rs718.78 bn via OMOs during this time, and thus necessitated a more permanent source
of liquidity infusion. The CRR cut will release Rs320 bn into the banking system but, in our
opinion, this is unlikely to bring back the liquidity deficit within RBI’s (-)1% of NDTL comfort zone.
We expect the RBI to supplement the CRR cut with OMOs and look for another Rs300-400 bn of
OMOs by the RBI in the remainder of the financial year (Exhibit 1).
FY2012E GDP growth projection revised down to 7.0%
The RBI revised down its FY2012E GDP growth target to 7.0% from 7.6%, having already
highlighted the downside risks to growth target in its December 16, 2011 mid-quarter review.
The downward revision was on account of the increase in global uncertainty; slowdown in
investments, higher interest rates and policy inertia. While the RBI expects FY2013E growth to be
better than FY2012E, our own view is GDP growth in FY2013E will be largely unchanged at 6.6%
from 6.7% in FY2012E as the weakness in investment activity hampers future growth prospects
and as the slowdown in the industrial sector feeds into a slowdown in the services industry.
RBI’s inflation target for end-FY2012E retained at 7.0%, reflecting upside risks
The RBI retained its March 2012-end headline WPI projection at 7.0%, to reflect the lagged impact
of Rupee depreciation on core inflation which is delaying the adjustment of inflation to slower
growth as well as adjustment in the administered prices of coal and petroleum products. Despite
the sharp drop in headline WPI to 7.40% in December from 9.11% in November, the RBI’s
assessment of the inflation dynamics remains loaded with upside risks. For FY2013E, the RBI
expects some moderation in headline WPI, but upside risks are likely to manifest through (1) the
current seasonal decline in vegetable prices, which has been behind the sharp moderation in
headline WPI, could reverse in the coming months, (2) protein-rich food items continue to show
high rates of inflation, reflecting the structural supply impediments of these items, (3) non-food
manufacturing inflation at 7.70% in December remains above the RBIs comfort zone, as the
Rupee depreciation has eroded the positive impact of lower commodity prices, (4) geo-political
risks could prevent any correction in global crude oil prices, (5) element of suppressed inflation
remains (RBI possibly factors in some pass-through of fuel prices to end users), (6) inability of the
Central Government to rein in its finances (consistently high aggregate demand).
Rate cuts on the horizon, we look for a repo cuts beginning April 2012
Today’s CRR cut came as a surprise to us, especially as recent communication by the RBI had
classified the CRR more as a monetary policy instrument rather than as a liquidity infusing
tool. In fact, as recent as January 5, 2012, Deputy Governor Gokarn had opined “We do not
want to get into a situation where we ease early and then inflation flares up again which
makes our stance very difficult to both manage and communicate”. We thus expected the
RBI to leave the CRR unchanged in today’s policy. However, the RBI has clearly used the CRR
cut today to not only inject primary liquidity into the system but also signal that policy
interest rates are headed lower – “The reduction (in CRR) can also be viewed as a
reinforcement of the guidance that future rate actions will be towards lowering them.”
However, it is the timing of the rate cut that remains a question. Even as the growth risks
manifest in a more stark way than was earlier anticipated by the RBI, the discomfort of the
RBI in terms of starting off an immediate reversal in the monetary policy is apparent as it
clearly highlights that risks to inflation remain on the upside.
As our base case, we expect the RBI to start reducing the repo rate by 25 bps at the time of
the Annual Policy Statement on April 17, 2012 due to the following reasons
The policy document indicates that a reduction in the policy rate will depend upon “signs
of a sustainable moderation in inflation”. In our view, the RBI will want to wait it out till
April to get this confirmation before easing policy rates. At the time of the April policy,
the RBI will be armed with the provisional estimates of March headline WPI. Further, it
would also have a clear sense of the Rabi crop perspectives, where some questions have
been raised in light of some states being declared as drought affected. Sowing patterns
till date have also not been encouraging. As of January 20, 2012 total area sown under
Rabi crops is down 1.2%, with pulses (-1.4%) and oilseeds (-6.7%) leading the drop.
The RBI has indicated that absence of credible fiscal consolidation will constrain it from
reducing policy rates to support growth as persistence of a high fiscal deficit pushes up
the aggregate demand in the economy and is therefore inflationary. Thus, the RBI could
be awaiting the announcement of the Union Budget (some media reports indicate that
the Union Budget could be announced on March 16, 2012) to take a view on the policy
interest rate cycle going ahead. Given that the mid-quarter review of RBI’s monetary
policy is on March 15, 2012, the RBI might want to skip any announcement here due to
the lack of a clear view on the budget numbers.
Even after arguing as above, it could be risky to totally ignore a positive probability of
interest rate cuts to start in March itself. This could however be conditioned by the industrial
production numbers and other growth indicators (such as GDP data for 3QFY12E to be
announced on February 29). With PMI (both services and manufacturing) having moved
higher as of the latest data available (December 2011) the probability of a March rate cut
appears low
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Monetary Policy
RBI Monetary Policy – CRR cut to 5.5%, repo cuts to follow. The Reserve Bank of
India, in its Third Quarter Review, left the repo rate unchanged at 8.50% even as it
brought down the CRR by 0.50% to 5.50%. The cut in CRR will release `320 bn
starting fortnight of January 28, 2012 and enable a reduction in the structural liquidity
deficit. This will enable a reduction in the banks’ cost of funds and is also equivalent to
a monetary signal. Even as the leaning of the monetary stance is towards addressing
growth risks, the RBI considers a rate cut at this juncture as ’premature‘ on still high
inflation and also due to the upside risks to inflation. We expect the RBI to begin
reducing the repo rate only in the April 17, 2012 annual policy review.
RBI cuts CRR by 50 bps to bring down structural liquidity deficit
The RBI cut the CRR by 50 bps to 5.50% effective the fortnight beginning January 28, 2012 as the
persistence of tight liquidity conditions risked disrupting credit flow to the commercial sector,
adding to downside risks to growth. Banking system liquidity deficit has averaged `1,102 bn since
the beginning of November 2011, well above RBI’s comfort of (-)1% of NDTL, with recent peaks
being a deficit of `1,566 bn. The liquidity tightness that was being witnessed recently is definitely
structural in nature and not transitory as it has emerged out of forex intervention by the RBI and
higher currency in circulation. Surprisingly, the liquidity deficit has persisted despite the RBI
injecting Rs718.78 bn via OMOs during this time, and thus necessitated a more permanent source
of liquidity infusion. The CRR cut will release Rs320 bn into the banking system but, in our
opinion, this is unlikely to bring back the liquidity deficit within RBI’s (-)1% of NDTL comfort zone.
We expect the RBI to supplement the CRR cut with OMOs and look for another Rs300-400 bn of
OMOs by the RBI in the remainder of the financial year (Exhibit 1).
FY2012E GDP growth projection revised down to 7.0%
The RBI revised down its FY2012E GDP growth target to 7.0% from 7.6%, having already
highlighted the downside risks to growth target in its December 16, 2011 mid-quarter review.
The downward revision was on account of the increase in global uncertainty; slowdown in
investments, higher interest rates and policy inertia. While the RBI expects FY2013E growth to be
better than FY2012E, our own view is GDP growth in FY2013E will be largely unchanged at 6.6%
from 6.7% in FY2012E as the weakness in investment activity hampers future growth prospects
and as the slowdown in the industrial sector feeds into a slowdown in the services industry.
RBI’s inflation target for end-FY2012E retained at 7.0%, reflecting upside risks
The RBI retained its March 2012-end headline WPI projection at 7.0%, to reflect the lagged impact
of Rupee depreciation on core inflation which is delaying the adjustment of inflation to slower
growth as well as adjustment in the administered prices of coal and petroleum products. Despite
the sharp drop in headline WPI to 7.40% in December from 9.11% in November, the RBI’s
assessment of the inflation dynamics remains loaded with upside risks. For FY2013E, the RBI
expects some moderation in headline WPI, but upside risks are likely to manifest through (1) the
current seasonal decline in vegetable prices, which has been behind the sharp moderation in
headline WPI, could reverse in the coming months, (2) protein-rich food items continue to show
high rates of inflation, reflecting the structural supply impediments of these items, (3) non-food
manufacturing inflation at 7.70% in December remains above the RBIs comfort zone, as the
Rupee depreciation has eroded the positive impact of lower commodity prices, (4) geo-political
risks could prevent any correction in global crude oil prices, (5) element of suppressed inflation
remains (RBI possibly factors in some pass-through of fuel prices to end users), (6) inability of the
Central Government to rein in its finances (consistently high aggregate demand).
Rate cuts on the horizon, we look for a repo cuts beginning April 2012
Today’s CRR cut came as a surprise to us, especially as recent communication by the RBI had
classified the CRR more as a monetary policy instrument rather than as a liquidity infusing
tool. In fact, as recent as January 5, 2012, Deputy Governor Gokarn had opined “We do not
want to get into a situation where we ease early and then inflation flares up again which
makes our stance very difficult to both manage and communicate”. We thus expected the
RBI to leave the CRR unchanged in today’s policy. However, the RBI has clearly used the CRR
cut today to not only inject primary liquidity into the system but also signal that policy
interest rates are headed lower – “The reduction (in CRR) can also be viewed as a
reinforcement of the guidance that future rate actions will be towards lowering them.”
However, it is the timing of the rate cut that remains a question. Even as the growth risks
manifest in a more stark way than was earlier anticipated by the RBI, the discomfort of the
RBI in terms of starting off an immediate reversal in the monetary policy is apparent as it
clearly highlights that risks to inflation remain on the upside.
As our base case, we expect the RBI to start reducing the repo rate by 25 bps at the time of
the Annual Policy Statement on April 17, 2012 due to the following reasons
The policy document indicates that a reduction in the policy rate will depend upon “signs
of a sustainable moderation in inflation”. In our view, the RBI will want to wait it out till
April to get this confirmation before easing policy rates. At the time of the April policy,
the RBI will be armed with the provisional estimates of March headline WPI. Further, it
would also have a clear sense of the Rabi crop perspectives, where some questions have
been raised in light of some states being declared as drought affected. Sowing patterns
till date have also not been encouraging. As of January 20, 2012 total area sown under
Rabi crops is down 1.2%, with pulses (-1.4%) and oilseeds (-6.7%) leading the drop.
The RBI has indicated that absence of credible fiscal consolidation will constrain it from
reducing policy rates to support growth as persistence of a high fiscal deficit pushes up
the aggregate demand in the economy and is therefore inflationary. Thus, the RBI could
be awaiting the announcement of the Union Budget (some media reports indicate that
the Union Budget could be announced on March 16, 2012) to take a view on the policy
interest rate cycle going ahead. Given that the mid-quarter review of RBI’s monetary
policy is on March 15, 2012, the RBI might want to skip any announcement here due to
the lack of a clear view on the budget numbers.
Even after arguing as above, it could be risky to totally ignore a positive probability of
interest rate cuts to start in March itself. This could however be conditioned by the industrial
production numbers and other growth indicators (such as GDP data for 3QFY12E to be
announced on February 29). With PMI (both services and manufacturing) having moved
higher as of the latest data available (December 2011) the probability of a March rate cut
appears low
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