Monetary Policy Review April 12

April 17th, 2012

Kotak30
September 2010

Monetary Measures

Key Rates CRR Reverse Repo rate Repo Rate MSF Rate Bank Rate SLR Unchanged at 4.75%

Measures

Automatically reduced by 50 bps to 7.00% (affixed at 100 bps below repo) Reduced by 50 bps to 8.00% Automatically reduced by 50 bps to 9.00% (affixed at 100 bps spread over repo) unchanged at 9.0% Unchanged at 24%

Economic Trend
The 50 bps repo rate cut by RBI came as a positive surprise for the market. The market was anticipating a 25 bps rate cut, and therefore the monetary policy action was seen as a huge sentiment booster. This reduction comes in the backdrop of moderating economic growth and stabilizing inflationary trend. Thus, this provides the central banker the window to give the much needed credit policy stimulus to the economy; as also support the liquidity conditions in the market. Inflation: The Inflationary situation in India seems to have started to stabilize off late. The growth in the WPI index in the March 2012 stood at 6.89% vis--vis the 9.68% in March-2011. The average inflation in the last 12 months has been around 8.88%, and as such, the present inflationary trend is indicative of the on setting moderation in price growth in the general economy. However, the central banker remains cognizant of the growth in international crude oil prices, and also of the fiscal necessity to pass-through the crude price hike to the consumers. Nonetheless, the central banker may be taking succor from the fact that the pricing power with the industry is limited. Therefore, the likelihood of an eventual pass-through of the prices to the consumers may not be entirely proportional. This, in-turn, may have provided the central banker the premise to provide a potential credit growth stimulus to the economy; without an immediate risk of generalized inflation from a possible fuel price hike.

Monetary Policy Review April 12

April 17th, 2012

Kotak30
September 2010

At the industrial front, the average IIP growth for last 6 months has come down to 1.9% yoy. All the same, the capital goods sector has seen a de-growth of -7% in the last 6 months. Consequently, the reduction in the repo rate may be the critical first step in restarting the industrial investment cycle by reducing capital costs.

Manufacturing
9.00% 7.00% 5.00% 3.00% 1.00% -1.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00%
April-11

Primary

September-11

December-11

July-11

February-11

October-11

February-12 Februar

March-11

June-11

November-11

January-11

August-11

30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00%

Feb-11 Apr-11 Sep-11 Mar-11 Dec-11 Feb-12 Jun-11 May-11 Mar-12 Jul-11 Aug-11 Oct-11 Nov-11 Jan-11 Jan-12

Fuel

30.00% 25.00% 20.00% 15.00% 10.00% 5.00%

January

Metallic Minerals

August-

Septem

Octobe

Novem

Decem

Februar

March-11

June-11

January

0.00%

January-12

Early signals from growth in the prices of metallic minerals (copper ore, iron ore, bauxite etc), is already indicative that industrial growth may be revving up. Thus, with the visible spurt in credit off-take and reduced lending cost, the economy may get the necessary thrust to resume the previously observed growth momentum.

Market Perspective
In wake of the impending fuel price hike, the 50 bps repo rate cut by RBI may have come as a pre-emptory step to cushion the moderation in the economic growth. Moreover, the increase in MSF cap from 1% to 2% of NDTL (Net Demand and Time Liabilities) enables the RBI to meet the liquidity shortage more effectively ( and at reduced rate for the banking system). The depth and extent of the rate reduction is aimed at allowing for the rate pass-through to reach the end consumers. In that context, we may see a gradual decline in lending rates, and perhaps, also a marginal reduction in deposit rates. This may provide a larger cue for the real interest rates in the economy to come down over next few months.

March-12

April-11

May-11

July-11

March-12

May-11

Monetary Policy Review April 12

April 17th, 2012

Kotak30
September 2010

However, the impending hike in the fuel prices does have a risk of spilling over into the general economy. In view of this, RBI has adapted a circumspect stance and may watch out for the entire phenomenon to playout, before it moves to readjust the repo rate again. Thus, in absence of further cues, the supply pressure from gsec borrowings may gradually push up the 10 year yields, again. We expect the 10 year benchmark to trade in the 8.25-8.50% range for next few months. The monsoon forecast and growth data from China (for its effect on oil prices) would be additional factors to watch out in the months ahead. In the closing, the market outlook may stand to gain were the OMO operations to be announced for this fiscal. Moreover, the possible decline in the oil prices, and/or, the hike in the FII investment ceiling, too, may be conducive to for market outlook.

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