RBI Tone Dovish, Cut Repo Rate and CRR by 25bps Each - Microsec

The Reserve Bank of India (RBI) has come out with its Third-Quarter Monetary Policy review and surprised many economists considering RBI's cautious view in its macroeconomic report. Albeit, the policy stance is in line with our expectations. The RBI cut the Repo Rate and Cash Reserve Ratio (CRR) by 25bps each to 7.75% and 4.00% respectively. The Reverse Repo Rate under the Liquidity Adjustment Facility (LAF) determined with a spread of 100 basis points below the repo rate, stands adjusted to 6.75%. Whereas, the Marginal Standing Facility (MSF), which is determined with a spread of 100 basis points above the Repo Rate, stands adjusted to 8.75% and Bank Rate also stands adjusted to 8.75%. Moreover, 25bps cut in CRR or the portion of deposits banks keep with the RBI will injectINR180 billion of primary liquidity into the banking system. However, RBI indicated that food inflation which is pushing up consumer price inflation is still the matter of concern GDP growth (y-o-y) was marginally lower to 5.3 per cent in Q2 of 2012-13 from 5.5 per cent in the previous quarter. GDP growth was 6.7 per cent YoY during the same quarter of last year. The decline in GDP growth was mainly blamed on lower growth in Manufacturing and Agriculture sectors. However, RBI has revised GDP growth for FY13 down from 5.8 per cent set out in the SQR to 5.5 per cent.

The WPI inflation eased significantly to 7.2 per cent YoY in December from 8.1 per cent YoY in September 2012, mainly, owing to softening of non-food manufacturing products' prices. However, CPI inflation rose to 10.6 per cent YoY in December, largely reflecting the surge in food inflation. However, RBI has revised WPI inflation projection for FY13 downwards from 7.5 per cent set out in the SQR to 6.8 per cent. India's Industrial Production (IIP) growth contracted marginally by 0.1 per cent YoY in November 2012, partly on seasonal factors and base effect. Meanwhile, the growth in the Industrial Production during October 2012 was at 8.3 per cent - highest in previous 16 month.

On the liquidity front, the liquidity conditions are still above the RBI comfort zone (+/- 1 percent of NDTL). As on January 29, 2013, the net borrowing under the Liquidity Adjustment Facility (LAF) wasINR913.10 billion. It is mainly, due to the widening wedge between deposit and credit growth and high cost of capital. YoY money supply (M3) growth fell to 12.9 per cent by mid-January and remained below the indicative trajectory of 14.0 per cent. This reflected the deceleration of growth in aggregate deposits and moderation in economic activity.

RBI indicated that food inflation, which is pushing up Consumer Price Inflation (CPI) is still the matter of concern and there is an increasing likelihood of inflation remaining range bound around current levels going into 2013-14. This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks.

The Indian rupee touched nearly 53.92 per US dollar on 28 th January 2013, depreciated nearly 9 per cent in last one year. Slowdown in the inflow of overseas fund, widening current account and fiscal deficit and uncertainty of global and domestic economies have made the Indian rupee weak. However, the government has taken number of steps to put brakes on subsidy, enhance capital flows and investments in the economy to tame the Current Account Deficit (CAD) and also to strengthen INR. We believe that government's number of initiatives with its rigid stance on it to revive the economy may tame the Current Account Deficit which will help in the rupee appreciation.

The WPI inflation significantly down from 8.10 per cent YoY in November 2012 to 7.18 per cent in December 2012. It is mainly, owing to softening of non-food manufacturing products' prices, which have a weight of 55 per cent in the WPI. However, CPI inflation rose to 10.6 per cent YoY in December, largely reflecting the surge in food inflation. Moreover, RBI has revised WPI inflation projection for FY13 downwards from 7.5 per cent set out in the SQR to 6.8 per cent. Falling WPI inflation led by manufacturing inflation and declining growth has mounted pressure on RBI to touch the repo button this time. For the full year of CY13, we expect 75-100bps rate cut (including current cut), back by the expectation of further softening inflation figures and reduction in Current Account Deficit (CAD). However, RBI may cut the rate gradually rather than significantly. Growth inflation dynamic may be the key ticker of the regulator's further policy stance.

Source : Equity Bulls

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