Second bi-Monthly Monetary Policy Review FY17 - 07 June 2016

Policy rates Kept Unchanged

Inflation target retained at 5% for Mar'17 with upward bias | Monsoon performance to be critical for future policy
Policy Measures Policy At A Glance
Inflation-Interest Rate Trajectory In a Nut Shell

Repo Rate unchanged @ 6.5%; Reverse Repo stands @ 6.00% Globally, economic activity has remained muted. US growth rate remains slower than
CRR remained unchanged @ 4.0% expected but EURO area & Japan posted relatively stronger growth numbers. Amongst
Marginal Standing Facility stands @ 7.0% EMEs, growth slowed in China with weakness in industrial and investment activity.
Bank Rate @ 7.0%
Financial markets around the globe continue to show an upward move with
softening in yields on the back of several factors like firming up of crude prices and less
fear of global recessionary risks.

Domestic GVA @ 7.2% reported a sequential pickup in activity in Q4 in line with

estimates. Monsoon performance w.r.t forecast would be critical for outlook on
agriculture as reservoir levels has depleted to 17% of capacity.

There are signs of improving corporate performance in Non-financial segment. While

private investments remain weak, Public investments are improving in roads &
railways.

Total value of exports declined in USD term inspite of an increase in volume.

Similarly, imports also fell sharply across constituents resulting in narrowing of trade
deficit to half of its last year levels.

G-Sec Yield Curve Domestic Economic Overview

10 Yr Benchmark G-Sec Yield Curve - MOM & YOY

Inflation has moved up again in Apr16 led by more than seasonal jump in
food prices and pulses. On the other hand, inflation rate stabilized in edible
oils, spices, non-alcoholic beverages and cereals. Overall, inflation rate was
sticky and above 5%.

Going forward, upside risk to inflation remains from firming global

commodity prices (including crude), implementation of 7th pay commission
awards and stickiness in core inflation (ex food & fuel). Accordingly, inflation
projections were retained at 5% for Mar17 with upward bias.

Liquidity tightened in May because of stronger currency demand and

slower Govt. expenditure. During Apr-May 2016, RBI conducted OMO worth
INR 700 bn and conducted term repo auctions to infuse liquidity. RBI aims to
progressively lower the liquidity deficit in system to neutrality.

Going Forward:

Since the last monetary policy in Apr16, inflationary pressure has revived in certain food items. Simultaneously, the uncertainties over
Monsoon performance and supply side reforms to limit inflation pressure called in RBI to hold policy rates for the time being. However,
RBI continues to maintain an accommodative policy stance while monitoring economic and financial developments. Alongside, RBI
reiterated for policy transmission and capital infusion in public sector banks to revive growth and expand capacity utilization across
productive sectors of economy.

Markets, both equity & debt, reacted positively to this policy dictum reflecting a sense of consolidation in investor expectations. The
current macro scenario reflects a mixed bag with positives from Monsoon, Fiscal management, Liquidity, FII confidence, Forex reserves,
CAD etc. Simultaneously, concerns remain alive over inflation trajectory, credit growth & capacity expansion plans. Overall, the risk-
reward ratio remains favorable keeping investors inclined to Indian markets. We expect a short phase of consolidation in the immediate
future and subsequently trajectory to be led by three critical factors i.e. Inflation, Monsoon & US FED policy stance.
Second bi-Monthly Monetary Policy Review FY17 - 07 June 2016
Policy rates Kept Unchanged
Inflation target retained at 5% for Mar'17 with upward bias | Monsoon performance to be critical for future policy
Credit Growth | Deposit Growth | Credit-Deposit ratio Daily LAF Borrowings by Commercial Banks (INR Bn)
Schedule Commercial Banks Credit & Deposit Growth Rate SCB's Daily LAF Operations With RBI

Y-O-Y Growth (%) Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Dec-Jun'16 Jun-15
Policy Rates Change
Repo 6.75% 6.75% 6.75% 6.75% 6.50% 6.50% 6.50% -0.25% 7.25%

Rev Repo 5.75% 5.75% 5.75% 5.75% 6.00% 6.00% 6.00% 0.25% 6.25%

CRR 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 0.00% 4.00%

SLR 21.50% 21.50% 21.50% 21.50% 21.25% 21.25% 21.25% -0.25% 21.50%

Credit Deposit Growth Rates Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Change Jun-15

Deposit Growth 11.10% 11.50% 10.90% 11.30% 10.60% 10.10% 9.80% -1.30% 11.70%

Credit Growth 9.00% 11.00% 11.30% 11.50% 11.50% 10.40% 9.80% 0.80% 9.80%

Credit-Deposit ratio 75.27% 75.84% 76.32% 76.42% 77.06% 76.05% 76.01% 0.74% 75.99%

Incremental Credit Deposit Ratio 56.05% 65.94% 73.12% 74.52% 81.54% 4.40% 1.64% -54.41% 50.36%

Macroeconomics Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Cumulative Jun-15

IIP (Growth) -0.91% -1.48% 1.99% 0.05% N.A N.A N.A -0.09% 4.24%

Inflation (WPI) -1.06% -1.07% -0.85% -0.85% 0.34% N.A N.A -0.70% -2.13%

Inflation (CPI) 5.61% 5.69% 5.18% 4.83% 5.39% N.A N.A 5.34% 5.40%

FII Flow - Debt (INR Bn) -54.88 23.13 -81.95 18.14 64.18 -44.09 N.A -75.46 17.37

FDI Flows (INR Bn) 308.65 334.61 212.68 165.30 N.A N.A N.A 1021.24 131.15
N/A- Data Not Released Yet
Senior Manager : Rahul Chandalia | Email: rahul.chandalia@spagroupindia.com | Tel: 011 4567-5536

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