Monetary Easing Starts - RBI Monetary Policy Review - Karvy Private Wealth

Mr. Varun Goel, Head - Equity PMS (Karvy Private Wealth)

RBI announced the Third Quarter Monetary policy review today.

Policy actions undertaken are as follows:

- CRR cut by 50 bps from 6% to 5.5%
- Repo and Reverse repo kept unchanged
- GDP growth guidance revised down to 7% from 7.6%

RBI started the reversal of the tight monetary policy with a 50 bps cut in cash reserve ratio (CRR). The tone of the policy statement by the Governor continues to be dovish while he expressed concerns about inflation remaining sticky. The CRR cut would address structural pressure on liquidity and would add 32000 crores to the banking system. RBI governor expressed his inability to cut repo rates just yet due to a very expansionary fiscal policy which has resulted in inflationary pressures staying elevated. RBI has maintained an end March inflation target of 7%. According to RBI, the high crude oil and commodity prices, which remain volatile, could provide upside risks to inflation.

On growth, RBI believes that the moderation has been more than expected. RBI expressed concern about the ongoing European debt crisis and the downward risks to growth that emanate from that. Growth has bounced back in United States, however, in the emerging world, growth continues to slide down. Domestically too, the effect of policy inaction and monetary tightening has resulted in significant slowdown in investment activity leading to lowering of GDP growth estimates. RBI now expects GDP growth in FY12 at 7%.

On rupee, governor mentioned that RBI will take action as and when appropriate. Some amount of inflationary pressure is also a result of significant rupee depreciation in last quarter. RBI has been proactive in taking measures to increase capital flows in the country and sounds determined to defend the rupee in the short term.

Equity View: We believe that this is the beginning of monetary easing and would expect a cumulative repo rate cut of 100-150bps for this calendar year. The biggest beneficiaries of this reversal in policy would be interest rate sensitive sectors like banks, autos and capital goods. We are becoming more constructive on these sectors now. Several PSU banks which were badly beaten down, look extremely attractive from a valuation perspective.

Source : Equity Bulls

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