Mid Quarter Monetary Policy Review | Banking

March 19, 2013

Mid Quarter Monetary Policy Review

RBI reduces repo by 25bp, along expected lines
Policy Measures

Vaibhav Agrawal
022 3935 7800 Ext: 6808 vaibhav.agrawal@angelbroking.com

Bhupali Gursale
022-3935 7800 Ext: 6820 bhupali.gursale@angelbroking.com

The Reserve Bank of India (RBI) in its Mid Quarter Monetary Policy Review delivered on expected lines and reduced the repo rate by 25bp from 7.75% to 7.50%. Consequently, the reverse repo rate stands adjusted to 6.50% and the marginal standing facility (MSF) rate and bank rate stand adjusted to 8.50%. The Cash Reserve Ratio (CRR) stands unchanged at 4.00% of banks net demand and time liabilities. Headroom for easing remains quite limited. Going ahead, we expect a 50bp reduction in the repo rate for FY2014.

Policy stance growth-supportive

We believe that the deceleration in economic growth along with the recent moderation in WPI inflation (particularly ebbing of core inflation) and governments moves towards fiscal consolidation have motivated monetary policy to adopt a more growth-supportive stance. Real GDP growth for 3QFY2013 came in at a decade-low of 4.5% as compared to growth of 5.3% in 2QFY2013 and 6.0% in the corresponding quarter of the previous year. We believe that recovery in economic growth is likely to be gradual and expect real GDP growth at 5.7% in FY2014.

But guidance is cautionary

At the same time, we believe that the RBI remains cautionary owing to 1) elevated food inflation and correction in administered fuel prices, since it has time and again underscored its commitment to anchoring inflationary expectations, 2) divergence between CPI and WPI inflation (by 407bp) compounding the growth-inflation dynamic 3) CPI inflation being above double-digits suggesting negative real interest rate for savers, and 4) high current account deficit. In view of these factors, the central bank has indicated that headroom for further monetary easing remains quite limited. We expect a 50bp reduction in the repo rate for FY2014. We believe that the RBI has maintained a balanced approach in its policy, focusing on addressing risks to growth as well as inflation.

Calibrating policy mix for growth

More importantly, in its policy statement the RBI reiterated that the key to reinvigorating growth is accelerating investment. In that respect, in addition to lower interest rates, the RBI has spelled out conditions like bridging supply side constraints in the economy, fiscal consolidation and improvement in governance, effectively putting the ball in the governments court. We believe that with focus on consolidation, fiscal policy too is moving in the right direction owing to measures such as the lower budgeted fiscal deficit (at 4.8% of GDP in FY2014) and increase in administered fuel prices. We believe further structural reforms related to the power and mining sector, speeding up of investments by removing hurdles in regulatory clearances and land acquisition, etc are imminent to tackle supply bottlenecks in the economy and support economic growth.
Please refer to important disclosures at the end of this report

Mid Quarter Monetary Policy Review

Exhibit 1: Downtrend in real GDP growth

(%) 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 5.8 3.5 5.7 9.8 8.5 9.0 7.5 11.2 9.7 8.9 9.3 9.2 7.5 6.5 6.0 Real GDP

Exhibit 2: Moderation in inflation as core recedes

(%) 10.0 8.0 5.3 5.5 5.3 6.0 4.0 2.0 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 3.8 6.8 Core Inflation WPI Inflation

4.5

Source: CSO, Angel Research

Source: Office of Economic Adviser, Angel Research

Exhibit 3: Divergence between WPI and CPI inflation

(%) 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 Oct-12 Jan-12 Nov-12 Jan-13 Feb-12 May-12 Mar-12 Aug-12 Sep-12 Dec-12 Feb-13 Apr-12 Jun-12 Jul-12 6.8 WPI Inflation CPI inflation 10.9

Exhibit 4: CAD at record high level of 5.4% of GDP

(USD bn) 25.0 20.0 15.0 10.0 5.0 0.0 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 16.3 12.7 Feb-13 (% of GDP) 6.0 5.0 4.0 3.0 2.0 1.0 0.0

Current account deficit

Current account deficit/GDP (RHS)

Source: Office of Economic Adviser, RBI, Angel Research

Source: RBI, Angel Research

Exhibit 5: Easing of key policy rates

(%) 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-1 4.00 6.50 7.50 Repo rate Reverse Repo rate CRR

Exhibit 6: Wedge between credit and deposit growth

(%) 24.0 22.0 20.0 18.0 16.0 14.0 12.0 10.0 Apr-11 Jul-11 Nov-11 Mar-12 Jul-12 Oct-12 Credit growth Deposit growth

Source: RBI, Angel Research

Source: RBI, Angel Research

March 19, 2013

Mid Quarter Monetary Policy Review

Expect monetary transmission post April 2013

Since the government has deferred expenditure to curtail the fiscal deficit, the amount of government cash balances with the RBI reached at a higher-than-normal level taking the liquidity deficit to `1.4lakh cr. We believe that the liquidity scenario is expected to improve going into the next fiscal year and to that extent monetary transmission through a pass on in lending rates is likely post April 2013 and not immediately.

Exhibit 7: Public sector banks eased base rates

3QFY2012 Axis Bank ICICI Bank SBI Punjab National Bank Bank of Baroda
Source: Company, Angel Research

4QFY2012 10.00 10.00 10.00 10.75 10.75

1QFY2013 10.00 9.75 10.00 10.50 10.50

2QFY2013 10.00 9.75 9.75 10.50 10.50

3QFY2013 10.00 9.75 9.75 10.50 10.50

4QFY2013 10.00 9.75 9.70 10.25 10.25

10.00 10.00 10.00 10.75 10.75

Meanwhile, certain banks have hiked deposit rates owing to the wedge between credit and deposit growth and to meet their assets and liabilities requirement. The RBI has also indicated that it would continue to manage liquidity actively through OMOs to ensure adequate availability of credit to productive sectors of the economy and we expect the central bank to lower the CRR rate to improve monetary transmission.

March 19, 2013

Mid Quarter Monetary Policy Review

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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March 19, 2013

Mid Quarter Monetary Policy Review

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March 19, 2013