RBI Policy Review - You lead the way; I follow closely behind - BRICS

That aptly defines the RBI's mid-quarter policy review on 17 September 2012. RBI reduced CRR by 25bps releasing Rs170bn of primary liquidity into the banking system while keeping the repo and SLR at 8% and 23% respectively. While acknowledging the first steps recently undertaken by the government to arrest the fiscal slide, RBI's stance in future will be guided by the evolving growth-inflation dynamics. Should the government continue to deliver on promise, we won't rule out 50-75bps of repo rate cut by March 2013. This could be interspersed with CRR cuts to manage liquidity pressures as well.

Growth revival is not a switch that can flip on/off. While RBI admitted that growth risks have increased, in our view monetary policy has limited role in reviving growth. The reason for the current slowdown is due to slowdown in capex. This again depends on the past loan sanctions and data reveals that such sanctions have fallen sharply in last two years. In addition to that, more than two-third of the current capex intention are from projects that were sanctioned 2 or more years back. Thus it is unlikely that any fiscal consolidation measure or lose monetary policy will be able to revive growth in near term.

Expect repo rate cuts in future. In our view, the recent policy measure has done little to change the underlying growth momentum. It has only helped change the sentiment a bit for the better. In the absence of continued growth-oriented measures, economic growthwill weaken further. Keeping aside the impact of global commodity prices, a weaker growth should slow demand driven inflation as well as core-inflation over time. Under these conditions, it is reasonable to expect repo rate cuts to happen over time. The problem zone is higher commodity prices mainly crude. Global central banks haveannounced "open ended QEs", which is likely to have an upward impact on crude andother commodity prices, which will continue to put pressure on India's CAD.

Should we continue to be positively biased towards financials? In the event ofcontinued reform measure announcements from the government, financials will have reasonable upsides. However, the worries about growth and asset quality will remain for the next several quarters. In addition, a revival of the economy could see greater liquidity flow towards the industrial sector - utilities, core infrastructure, capital goods - while financials could relatively underperform the broader market. Among financials, it is better to stick with frontline stocks and niche players for downside protection and reasonable gains in the way up, in our view.

Source : Equity Bulls

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