Mid-Quarter Monetary Policy Review | Banking

December 16, 2011

Mid-Quarter Monetary Policy Review Status quo In-line with expectations

Holds on to key policy rates (Repo: 8.5%, Reverse Repo 7.5% and MSF at 9.5% ) Keeps SLR and CRR unchanged at 24.0% and 6.0%, respectively Policy tone turns more dovish Monetary policy actions are likely to reverse the cycle, responding to the risks to growth. The Reserve Bank of India (RBI) maintained status quo on key policy rates in its mid-quarterly monetary policy review. The policy action was in-line with RBIs guidance given in the previous policy review as well as with the consensus view of market participants on a status quo. A small section of the market was expecting a cut in CRR (on account of persistently tight domestic liquidity conditions), but the RBI ruled it out given the elevated inflation levels and RBIs preferred route of conducting OMO for easing systemic liquidity.

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

Shrinivas Bhutda
022 3935 7800 Ext: 6845 shrinivas.bhutda@angelbroking.com

Varun Varma
022 3935 7800 Ext: 6847 varun.varma@angelbroking.com

Key takeaways from the policy statement

On the growth front: The RBI noted that growth is clearly decelerating, reflecting the combined impact of several factors: uncertain global environment, cumulative impact of past monetary policy tightening and domestic policy uncertainties. The RBI also observed that the global economic outlook has worsened significantly since its previous policy review. With increased downside risks to growth, the RBI seemed to have shifting focus to at least sustaining current growth levels rather than taming the elevated inflation levels. On inflationary pressures: In the RBIs view, both inflation and inflation expectations remain currently above the RBIs comfort level. However, reassuringly, inflationary pressures are expected to abate, in the RBIs opinion, in the coming months despite high crude oil prices and INR depreciation. Growth deceleration is also expected to contribute to a decline in inflation momentum, which is also being helped by softening food inflation. Outlook on inflation and policy rates We expect WPI inflation to remain sticky at ~9% levels at least until December 2011, which is likely to force the RBIs hand in cutting the policy rates in the near term. However, from January 2012, we believe inflation is likely to start trending downwards, barring any major negative surprises on the global commodity price front. In fact, rising global growth concerns and declining fiscal stimulus measures in developed economies are likely to keep commodity and energy prices in check in the short term. The RBIs commentary turned more dovish as compared to its previous statements and seemed to take into account the increasing downside risks to growth and the need to support it more meaningfully. Hence, from CY2012, we see a meaningful case for the RBI to start cutting rates, especially considering the intensifying signs of slowdown on the domestic growth front, evident from slowing GDP growth rates, tepid IIP growth, moderating trend in PMI, declining vehicle sales, flat cement dispatches and considerable moderation in export growth.
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Mid-Quarter Monetary Policy Review

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December 16, 2011

Mid-Quarter Monetary Policy Review

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Fundamental: Sarabjit Kour Nangra Vaibhav Agrawal Shailesh Kanani Srishti Anand Bhavesh Chauhan Sharan Lillaney V Srinivasan Yaresh Kothari Shrinivas Bhutda Sreekanth P.V.S Hemang Thaker Nitin Arora Ankita Somani Varun Varma Sourabh Taparia Technicals: Shardul Kulkarni Sameet Chavan Sacchitanand Uttekar Derivatives: Siddarth Bhamre Institutional Sales Team: Mayuresh Joshi Hiten Sampat Meenakshi Chavan Gaurang Tisani Akshay Shah Production Team: Simran Kaur Dilip Patel Research Editor Production simran.kaur@angelbroking.com dilipm.patel@angelbroking.com VP - Institutional Sales Sr. A.V.P- Institution sales Dealer Dealer Dealer mayuresh.joshi@angelbroking.com Hiten.Sampat@angelbroking.com meenakshis.chavan@angelbroking.com gaurangp.tisani@angelbroking.com akshayr.shah@angelbroking.com Head - Derivatives siddarth.bhamre@angelbroking.com Sr. Technical Analyst Technical Analyst Technical Analyst shardul.kulkarni@angelbroking.com sameet.chavan@angelbroking.com sacchitanand.uttekar@angelbroking.com VP-Research, Pharmaceutical VP-Research, Banking Infrastructure IT, Telecom Metals, Mining Mid-cap Research Associate (Cement, Power) Research Associate (Automobile) Research Associate (Banking) Research Associate (FMCG, Media) Research Associate (Capital Goods) Research Associate (Infra, Real Estate) Research Associate (IT, Telecom) Research Associate (Banking) Research Associate (Cement, Power) sarabjit@angelbroking.com vaibhav.agrawal@angelbroking.com shailesh.kanani@angelbroking.com srishti.anand@angelbroking.com bhaveshu.chauhan@angelbroking.com sharanb.lillaney@angelbroking.com v.srinivasan@angelbroking.com yareshb.kothari@angelbroking.com shrinivas.bhutda@angelbroking.com sreekanth.s@angelbroking.com hemang.thaker@angelbroking.com nitin.arora@angelbroking.com ankita.somani@angelbroking.com varun.varma@angelbroking.com sourabh.taparia@angelbroking.com

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December 16, 2011