In line with expectations, the Reserve Bank of India (RBI) in its mid quarter policy review raised the key policy rates(repo and reverse repo rates) by 25 basis points each with
immediate effect. Consequently, the repo rate and reverserepo rates now stand at 7.5% and 6.5% respectively. The newly introduced marginal standing facility (MSF) rate
now stands at 8.5%. This is in line with the RBI’s earlier stated position of controlling inflation even at the cost of growth in the short term. Since the RBI expects inflation
to remain at higher levels due to high commodity prices,we expect the central bank to maintain its hawkish stance and increase the policy rates by another 50 basis points
by December 2011.
Policy highlights
Repo rate increased by 25 basis points to 7.5%
Reverse repo rate also increased by 25 basis points to
6.5%
MSF rate increased by 25 basis points to 8.5%
Cash reserve ratio (CRR) remains unchanged
Bank rate remains unchanged
Gross domestic product (GDP) growth estimate for FY 2012 maintained at 8%
The Wholesale Price Index (WPI) inflation has remained high for the past three months and continues to pose a major challenge. For March 2011, the WPI inflation was
revised upwards to 9.68% from the provisional figure of 9.02% reported earlier. Inflation for April and May 2011came in at 8.66% and 9.06% respectively and these figures
are likely to get revised upwards. While food inflationseems to be easing out, manufacturing inflation continues the upward trend. Going ahead, we expect inflation to
remain at elevated levels of 9.5% in H1FY2011 and around 8% in FY2012. This warrants further action (a 50-basis-point hike by December 2011) on the monetary policy front.
Led by the RBI’s monetary tightening over the past four quarters the growth is moderating in certain segments. The IIP (the 2004-05 series) grew by 6.3% in April compared
to 8.8% in March while the GDP growth declined to 7.8% in Q4FY2011 from 8.3% in Q3FY2011. According to the RBI, the deceleration is not broad based as demand
remains buoyant while the pricing power exists which leaves room for further tightening.
As a result of monetary tightening the lending rates have gone up sharply, which has slowed the credit growth. At the beginning of June 2011 the credit growth has declined
to 20.6% from 21.3% in March 2011 while the incremental credit-to-deposit ratio has declined to 80.5% from 95.3% in a similar period. We believe the credit growth for
FY2012 will be broadly in line with the RBI’s expectations due to the slowing of the investment activity and the high base of FY2011 (due to 3G lending).
After the policy rate hike of 50 basis points and a 50- basis-point increase in the savings bank interest rate by the RBI in the annual policy meet in May 2011, most of the
banks have increased their lending rates. Given the sharp increase in the lending rates in a short span and moderation in the investment activity, the pass-on would be difficult.Further, the lag impact of a rise in the deposit cost and sustained high deposit rates will affect the margins.
Outlook
We believe that the RBI’s preference for inflation management will result in another 50-basis-point hike over the next two quarters. Given the rising pressure on
inflation due to the rising commodity prices and strong demand pressure, further tightening cannot be ruled out. However, since the economy seems to be doing reasonably
well as indicated by the consumption numbers, the 50-basis-point hike could be absorbed. Going forward,commodity prices and monsoon will be the key factors
affecting the growth outlook for the economy.
immediate effect. Consequently, the repo rate and reverserepo rates now stand at 7.5% and 6.5% respectively. The newly introduced marginal standing facility (MSF) rate
now stands at 8.5%. This is in line with the RBI’s earlier stated position of controlling inflation even at the cost of growth in the short term. Since the RBI expects inflation
to remain at higher levels due to high commodity prices,we expect the central bank to maintain its hawkish stance and increase the policy rates by another 50 basis points
by December 2011.
Policy highlights
Repo rate increased by 25 basis points to 7.5%
Reverse repo rate also increased by 25 basis points to
6.5%
MSF rate increased by 25 basis points to 8.5%
Cash reserve ratio (CRR) remains unchanged
Bank rate remains unchanged
Gross domestic product (GDP) growth estimate for FY 2012 maintained at 8%
The Wholesale Price Index (WPI) inflation has remained high for the past three months and continues to pose a major challenge. For March 2011, the WPI inflation was
revised upwards to 9.68% from the provisional figure of 9.02% reported earlier. Inflation for April and May 2011came in at 8.66% and 9.06% respectively and these figures
are likely to get revised upwards. While food inflationseems to be easing out, manufacturing inflation continues the upward trend. Going ahead, we expect inflation to
remain at elevated levels of 9.5% in H1FY2011 and around 8% in FY2012. This warrants further action (a 50-basis-point hike by December 2011) on the monetary policy front.
Led by the RBI’s monetary tightening over the past four quarters the growth is moderating in certain segments. The IIP (the 2004-05 series) grew by 6.3% in April compared
to 8.8% in March while the GDP growth declined to 7.8% in Q4FY2011 from 8.3% in Q3FY2011. According to the RBI, the deceleration is not broad based as demand
remains buoyant while the pricing power exists which leaves room for further tightening.
As a result of monetary tightening the lending rates have gone up sharply, which has slowed the credit growth. At the beginning of June 2011 the credit growth has declined
to 20.6% from 21.3% in March 2011 while the incremental credit-to-deposit ratio has declined to 80.5% from 95.3% in a similar period. We believe the credit growth for
FY2012 will be broadly in line with the RBI’s expectations due to the slowing of the investment activity and the high base of FY2011 (due to 3G lending).
After the policy rate hike of 50 basis points and a 50- basis-point increase in the savings bank interest rate by the RBI in the annual policy meet in May 2011, most of the
banks have increased their lending rates. Given the sharp increase in the lending rates in a short span and moderation in the investment activity, the pass-on would be difficult.Further, the lag impact of a rise in the deposit cost and sustained high deposit rates will affect the margins.
Outlook
We believe that the RBI’s preference for inflation management will result in another 50-basis-point hike over the next two quarters. Given the rising pressure on
inflation due to the rising commodity prices and strong demand pressure, further tightening cannot be ruled out. However, since the economy seems to be doing reasonably
well as indicated by the consumption numbers, the 50-basis-point hike could be absorbed. Going forward,commodity prices and monsoon will be the key factors
affecting the growth outlook for the economy.
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