Prakriti Shukla and Tushar Poddar, Goldman Sachs:
While the rate hike was expected, the accompanying statement was fairly dovish. The RBI has revised its GDP growth forecast down to 7.6% from 8% for FY12. It also highlighted growing risks to growth from global factors and slowing domestic investment demand. Our FY12 GDP growth forecast remains at 7% with downside risks and we think the RBI may need to still revise its growth forecasts downwards.
The central bank also deregulated the savings bank deposit rate. We think this is a positive move for the economy, even though it is a negative for banks as it will increase their funding costs. The measure will increase competition and can enhance efficiency in the banking system, along with increasing real deposit rates for savers, who were suffering from negative real rates.
The RBI has signalled not just a pause but a stop to rate hikes, as we expected. We think the data on inflation would have to surprise significantly to the upside for the RBI to change its stance. We continue to think that with inflation and growth likely to surprise on the downside, the RBI will likely cut interest rates in April 2012, and we have built in 100 bp in rate cuts in FY13.
The RBI’s statement on exchange rate policy suggests to us that it may continue to intervene to prevent further depreciation.
The RBI has signalled not just a pause but a stop to rate hikes, as we expected. We think the data on inflation would have to surprise significantly to the upside for the RBI to change its stance. We continue to think that with inflation and growth likely to surprise on the downside, the RBI will likely cut interest rates in April 2012, and we have built in 100 bp in rate cuts in FY13.
The RBI’s statement on exchange rate policy suggests to us that it may continue to intervene to prevent further depreciation.
On liquidity, the RBI expressed satisfaction with the level of systemic deficit. This suggests to us that the RBI is still not ready to inject liquidity through open market operations or a CRR cut.
The focus will now shift to fiscal policy. We think that looser-than-expected fiscal policy and tighter-than-expected monetary policy is complicating the policy mix. We have recently revised up our central government fiscal deficit target to 5.8% of GDP for FY12, as revenues are slowing due to a waning of the growth momentum. The worsening policy mix can put upward pressure on government bond yields, and can be a negative for the INR. Now that monetary policy is on hold, the focus will shift to fiscal policy to rein in the Government’s borrowing needs.
Indranil Sengupta - Emerging Asia Economist, Bank of America Merrill Lynch:
Indranil Sengupta - Emerging Asia Economist, Bank of America Merrill Lynch:
We grow more confident of our call that the RBI will pause after today’s 25bp policy rate hike (and cut 100bp from April). Indeed, the RBI just stated that “the likelihood of a rate action in ‘December’ is relatively low. Beyond that, if the inflation trajectory conforms to projections, further rate hikes may not be warranted”. Along with the RBI, we also expect December inflation to peak off to 8% levels on January 14. Second, we are not surprised that Subbarao did not make any commitment to OMO. We continue to expect OMO (of about ` 1000bn) only in December-January after inflation cools off. Finally, the RBI deregulated interest rates on savings deposits. With loan demand slowing, savings rate hikes by large banks should, however, be limited to 25-50bp.
We believe that India’s rate cycle is peaking with inflation topping off. After all, the RBI should be done after today’s policy rate hike. If inflation comes off to 7.2% by March as we expect, the RBI will likely begin to cut 100bp April onwards. After all, high rates are biting growth: our lead indicators are tracking September quarter growth at 7-7.5%. In fact, the RBI is only being realistic in cutting its FY12 growth forecast to 7.6% (7.5% BofAMLe). Against this backdrop we reckon lending rate hikes are also almost done with loan demand likely to slip to 17% levels by March 2012 from 19.5%. In fact, lending rates should come off by 100bp in the coming April-September slack season. Finally, we expect the 10y to calm down to mid-cycle 8-8.5% levels with winter RBI OMO funding our expected 1.2% of GDP fiscal over run.
Rohini Malkani, Citi India:
Today’s rate hike marks the 13th rate action since the RBI began its tightening cycle. Unfortunately during this period, inflation has remained sticky at over 9%+ levels, while growth has taken a knock with the RBI now also cutting its FY12 estimates to sub 8% levels. However, given trends in commodity prices & domestic demand/supply balance, the RBI has maintained its 7% inflation estimate for Mar 12.
Going forward while the RBI has said that the likelihood of rate action is relatively low, if the expected deceleration in inflation does not play out, risks on further monetary action coupled with deteriorating global prospects and domestic policy issues adds downside risks to our FY12 GDP estimate of 7.6%. This is reminiscent of 2008, when the RBI was possibly the last Central Bank to keep hiking rates, which was one of the factors resulting in growth slipping to sub 7% levels.
The signalling of a pause has resulted in 10-year yields coming off from 8.7% v/s 8.8% prior to the policy. Going forward, yields are likely to be range bound with key drivers being the fiscal picture and the extent the RBI resorts to OMOs.
Barclays Capital:
We expect 10y G-secs to trade in a range of 8.65-8.90% in the near term as supply pressures continue. A respite will likely only come from RBI open market operations (OMOs) or increases in FII limits, in our view. Until announcements are made regarding either of these areas, we expect banks to remain hesitant to start buying bonds. The risks to this expected range are biased towards the downside and, we think, will depend on the timing of potential OMO announcements. However, we are constructive in the medium term as we expect the RBI to conduct ~INR1trn of OMOs to offset incremental tightness in liquidity. But given uncertainty over the timing of any announcement, we are cautious on bonds in the near term.
We expect banking system liquidity to remain tight over the next 3-6 months. Barring any injections by the RBI, we continue to expect changes in currency in circulation and CRR requirements to continue to drain total systemic liquidity
Nomura:
We believe the 25 bp hike was motivated by the persistently high inflation, as the WPI inflation rate was 9.7% y-o-y in September. The RBI policy statement suggests that the RBI will be cautious until there is a significant decline in headline inflation, even if that warrants further sacrifices to growth. As growth prospects appear to be weakening based on our own leading index, we expect no further rate hikes by the RBI in the current cycle.
Sudhakar Shanbhag, Chief Investment Officer, Kotak Mahindra Old Mutual Life Insurance:
The increase in repo rate by 25 bps each is largely in line with the market expectation, though the number of market participants expecting a pause had gone up post the macroeconomic report released. Though the RBI has chosen inflation control as its main focus at this point of time they have for the first time explicitly recognized the possibility of impact on growth and have indicated that if all data points are as expected then the need for a rate hike in December would be low.
Form a debt market perspective the overhang of supply and probable slippages in the fiscal deficit numbers were in consideration as also growth moderation which can impact long term interest rates. During this policy since RBI has recognized the growth implications and hence the government securities market has reacted positively in spite of rate hike.
The equity markets have largely discounted the higher inflation / interest rate environment and lesser growth relative to the previous year. Earning moderation is also recognized. Global developments especially in the Euro zone are keeping the markets on its toes. The catalyst would policy direction from an Indian perspective.
Rohini Malkani, Citi India:
Today’s rate hike marks the 13th rate action since the RBI began its tightening cycle. Unfortunately during this period, inflation has remained sticky at over 9%+ levels, while growth has taken a knock with the RBI now also cutting its FY12 estimates to sub 8% levels. However, given trends in commodity prices & domestic demand/supply balance, the RBI has maintained its 7% inflation estimate for Mar 12.
Going forward while the RBI has said that the likelihood of rate action is relatively low, if the expected deceleration in inflation does not play out, risks on further monetary action coupled with deteriorating global prospects and domestic policy issues adds downside risks to our FY12 GDP estimate of 7.6%. This is reminiscent of 2008, when the RBI was possibly the last Central Bank to keep hiking rates, which was one of the factors resulting in growth slipping to sub 7% levels.
The signalling of a pause has resulted in 10-year yields coming off from 8.7% v/s 8.8% prior to the policy. Going forward, yields are likely to be range bound with key drivers being the fiscal picture and the extent the RBI resorts to OMOs.
Barclays Capital:
We expect 10y G-secs to trade in a range of 8.65-8.90% in the near term as supply pressures continue. A respite will likely only come from RBI open market operations (OMOs) or increases in FII limits, in our view. Until announcements are made regarding either of these areas, we expect banks to remain hesitant to start buying bonds. The risks to this expected range are biased towards the downside and, we think, will depend on the timing of potential OMO announcements. However, we are constructive in the medium term as we expect the RBI to conduct ~INR1trn of OMOs to offset incremental tightness in liquidity. But given uncertainty over the timing of any announcement, we are cautious on bonds in the near term.
We expect banking system liquidity to remain tight over the next 3-6 months. Barring any injections by the RBI, we continue to expect changes in currency in circulation and CRR requirements to continue to drain total systemic liquidity
Nomura:
We believe the 25 bp hike was motivated by the persistently high inflation, as the WPI inflation rate was 9.7% y-o-y in September. The RBI policy statement suggests that the RBI will be cautious until there is a significant decline in headline inflation, even if that warrants further sacrifices to growth. As growth prospects appear to be weakening based on our own leading index, we expect no further rate hikes by the RBI in the current cycle.
Sudhakar Shanbhag, Chief Investment Officer, Kotak Mahindra Old Mutual Life Insurance:
The increase in repo rate by 25 bps each is largely in line with the market expectation, though the number of market participants expecting a pause had gone up post the macroeconomic report released. Though the RBI has chosen inflation control as its main focus at this point of time they have for the first time explicitly recognized the possibility of impact on growth and have indicated that if all data points are as expected then the need for a rate hike in December would be low.
Form a debt market perspective the overhang of supply and probable slippages in the fiscal deficit numbers were in consideration as also growth moderation which can impact long term interest rates. During this policy since RBI has recognized the growth implications and hence the government securities market has reacted positively in spite of rate hike.
The equity markets have largely discounted the higher inflation / interest rate environment and lesser growth relative to the previous year. Earning moderation is also recognized. Global developments especially in the Euro zone are keeping the markets on its toes. The catalyst would policy direction from an Indian perspective.
Sandeep Nanda, Chief Investment Officer, Bharti AXA Life Insurance:
While the RBI has hiked policy rates by 25bps, the indication of pause in the rates going forward has fulfilled hopes that the credit cycle has in all probability peaked. Likelihood of further rate hikes is relatively low keeping in view that inflation would decline beginning December 2011, that past monetary policy actions have started taking effect and developments in the global scenario has started affecting growth. Accordingly the RBI has revised the baseline projection of GDP growth for 2011-12 to 7.6% from 8% in the earlier policy. The baseline projection for WPI inflation for March 2012 has been kept unchanged at 7%. Given this policy stance, we expect rate sensitive sectors to perform better henceforth. However given the current liquidity environment, the deregulation of savings account rates would likely move up the interest cost curve for the entire banking system and the end borrowers. To that extent the policy may lead to hikes in bank base rates, increase interest rate volatility and also deal a blow to margins of banks with high savings deposits.
Aneesh Srivastava, Chief Investment Officer, IDBI Federal Life Insurance Company:
Ultimately, RBI has finally started reacting on signs of retardation in domestic growth, global macro economic uncertainties and high base effect of inflation that would kick in from December 2011. Hence, it has although increased rates by 25 bps, indicated that it would not increase policy rates in coming policy. We feel that, coupled with savings bank deregulation, there would be some pass through of higher costs to customers and hence would have impact on investment and consumption. This gets reflected in sharply revised GDP growth projections of RBI. Ball would now be in the Government’s court to address fiscal policy and supply side issues to tackle the situation from here on.
Banks with low CASA would marginally benefit as currently they are wholesale funded and hence they can garner saving account through competitive pricing and there average cost of borrowings would come down. Banks with high CASA with large ticket deposits would be impacted the most till system achieves new equilibrium.
Shriram Ramanathan, Portfolio Manager, Fixed Income, Fidelity Worldwide Investment:
The RBI delivered on market expectations by hiking rates by 25bps. However, it also explicitly heralded the end of the current rate hiking cycle, stating that the likelihood of another rate action in December is relatively low. In a clear shift of stance, the RBI has elevated the importance of economic growth slowdown (especially investments) in its policy priorities, and has also recognized that despite high headline inflation, recent underlying inflation momentum indicators have moderated in response to its past actions. The announcement provides much needed stability to the bond markets and medium term fixed income investors.
J. Moses Harding, Head, Global Markets Group, IndusInd Bank:
Now, there is build up of expectation that headline inflation and GDP growth trend will more or less meet around 7.5% by March 2012. This will enable RBI to shift operative policy rate from Repo rate to Reverse Repo rate by early 2012. It is premature to think of shift into rate cut mode at this stage given the complexities both in domestic and external sectors. The pressure on inflation will continue to stay valid driven by domestic supply side concerns and import content on higher input costs. RBI has also stressed its concerns on weak rupee diluting its monetary actions and we could see RBI arresting run-away weakness in rupee. The next couple of months will be critical on the way forward and it is important to see a clear downtrend in headline inflation without mindful of short term pressure on growth.
There will be stability in money (and fixed income) market. While 1-3M rates will continue to stay at elevated levels (tracking overnight MIBOR at 8.55-8.65%), rates are expected to soften beyond 3M tenor. This expectation is based on the belief that call money rate will soften into 7.50-7.75% range in Q4 of FY12 on shift of operative policy rate from 8.5% to 7.5%. Thereafter, if all goes well on the inflation front, we might see shift of operative policy rate to 7% by June 2012. There will be good investor appetite in 1Y bond above 8.5% and 10Y bond above 8.75%; thus setting up short term range play at 8.25-8.5% in 1Y and 8.50-8.75% in 10Y with short term target at 8% and 8.25% respectively. OIS rates will trend down and expected to stay within 7.90-8.15% in 1Y and 7.10-7.35% with short term target at 7.75% and 7% respectively.
RBI’s stance on rupee would give good comfort to importers but RBI would not mind rupee stability around 50 if downtrend in commodity prices is established. Having said this, there is no sign of dilution in risk aversion; dollar will stand to gain till economic recovery is sighted in advanced economies. We now watch 49.35-50.00 range with overshoot limited to 49.00-50.35. Importers can stay away allowing marginal gains into 49.35-49.00 (to buy 3-12M forward dollars) while exporters to absorb weakness into 50.00-50.35 (to sell 3M forward dollars). There is no change in view in FX premium; while there is dilution in interest rate play, exchange rate play will kick in to support downtrend. Let us watch consolidation in 3M at 4.50-5.5% and 2.75-3.25% in 12M.
The downward pressure from domestic cues seems arrested and need to set focus on external cues. It is back to consolidation play at 5,000-5,200 with short term range at 4,850-5,350. It will be traders market for the next couple of months and strategy would be to buy 5,000-4,850 and sell 5,200-5,350. Strategic investors can absorb extended weakness into 4,850-4,700.
Kislay Kanth, Senior Director, Research, MAPE Securities:
We believe that the RBI provided adequate comfort to analysts and investors today by (indirectly) mentioning that growth will become the priority after this round of rate hike. Moreover, deregulations of the savings bank interest rates will adversely impact some smaller-midsize PSU banks and can benefit some stronger private sector banks which have strong distribution network and better handle on their assets-liabilities.
The RBI has also deregulated the savings bank interest rates for deposits over ` 1,00,000 with immediate effect, which will enable banks to compete for savings account based on interest rates and service quality combined. In our opinion, this could adversely impact some PSU banks which may not be as competitive with relatively wealthier clientele as some of the better managed ones. We have a buy on BOB and PNB while we are NEUTRAL/NEGATIVE on BOI and UNBK
The RBI expects inflation to come off by Dec 2011 to its target of 8.0% and 7.0% by Mar 2012. It should moderate further in 1H FY2013 due to continued softening of commodity prices especially the Crude Oil and global Food prices. The exchange rate will be a critical factor to monitor in future. The RBI is very cautious on the global market conditions, where global growth rates are coming off and performance of Indian exports can get impacted in future. The contagion impact of problems in the EU and the US will be monitored by the RBI.
Tarun Kataria, CEO India, Religare Capital Markets:
An important aspect of this credit policy was the savings rate deregulation which will help monetary policy transmission. That said, it adds additional uncertainty around other savings rates which will need attention. What is also noteworthy is RBI going to the extent of saying that the likelihood and need for further rate hike is not significant. This should bring much needed certainty in policy trajectory and could potentially help improve the investment climate.
D. K. Aggarwal, CMD, SMC Investments and Advisors:
Both market and investors were looking at this credit policy meeting to get the sense of approach that RBI would take from here onward as a hike of 25 bps of Repo rate was very much discounted. RBI has clearly indicated that the further hike is not warranted and inflation would start moderating starting December 2011. Clearly the undertone of RBI is much softer this time and it has shown concern over the moderating growth and investments. The deregulation of saving rate and waiver of prepayment charge is expected to increase competition among banks. The deregulation of saving rate is expected to put pressure on interest rates and would increase the cost of deposits for banks.
Devendra Kumar Pant, Director, Fitch Ratings India:
As expected RBI raised policy repo rate by 25 basis points to 8.5% and trimmed down FY12 GDP growth projection to 7.6% from 8.0%. However, WPI based inflation target for March 2012 is kept unchanged at 7.0%. The policy detailed out various developmental and regulatory policies measures ranging from interest rate to financial markets and stability to credit delivery and regulation.
While RBI has suggested that the likelihood of a rate hike in December policy review is relatively low, it would largely depend on movement of inflation between now and December. While development in Euro area and the US are pointing towards slowing demand and commodity prices, Middle East developments have kept Brent crude prices at around 30% premium from WTI crude. Inflation trajectory would largely depend on movement of Brent crude prices post Gaddafi.
Developmental and regulatory policies measures will help in strengthening of Indian financial markets.
RICS:
Since the last RBI meeting in September this year where the key repo rate was raised by a quarter percentage point to 8.25%, there has been increasing speculation that the RBI may signal a pause in the monetary tightening cycle. This has been indicative by the decision of a number of other emerging market central banks to do the same and, in some cases, actually cut rates.
However, policymakers are continuing to grapple with exceptionally high inflation rates, which have once again resulted in the Central Bank to revise the repo rate to 8.50% and the reverse repo rate to 7.5%, with the CRR remaining at 6% in an attempt to provide an anchor to inflation expectations.
Even with the rate hike, the residential real estate sector is likely to remain relatively resilient in the face of more moderate pace of economic growth and the higher cost of borrowing. The JLL REIS third quarter numbers for the top seven metros indicate prices are broadly stable at recent highs and activity levels also essentially flat. Also, in spite of the relatively high cost of borrowing the credit growth for housing continues to post strong year-on-year gains.
However, there are a few signs that confidence, particularly amongst developers, may be slipping with a marginal drop in the number of new launches (30.3k units as compared to a four quarter average of 44.4k). In the case of commercial real estate, particularly office space, even though economic growth projections have slowed down to 7% - 7.5%, demand is likely to remain firm, helping underpin rental growth. However, the rate revisions may result in these trends moderating over the course of the coming months.
Hemant Kanoria, Chairman and Managing Director, SREI Infrastructure Finance:
In the build-up to the announcement of the Q2FY12 monetary policy, enough hints were dropped by the central bank that another rate hike was imminent. Thus, with inflation persistently remaining way above the comfort level, the RBI’s decision to increase repo and reverse repo rates by 25 basis points each (from 8.25% to 8.5% and 7.25% to 7.5% respectively) has been on expected lines.
Industry is truly concerned about the policy rate hikes and their adverse impact on the investment sentiment. Our country needs huge investments in infrastructure and half of that is expected to come from the private sector. I do not foresee how private sector will be able to mobilize resources from domestic sources in this scenario. The recent steep depreciation in the rupee has also pushed up our import bill which implies that inflation in India is no longer fuelled by domestic factors alone. The prices of key inputs like oil and coal are also to go up due to the rupee depreciation. Government, in conjunction with RBI, needs to immediately correct it, otherwise it will further push up inflation and lower GDP growth.
We expect this to be the final rate hike in this cycle. Keeping in mind how stressed industry is, we sincerely hope that this is not the final straw that broke the camel’s back.
Sanjiv Saddy, Executive President - Corporate Affairs, EMAAR MGF Land:
RBI has again increased repo and reverse repo rates by 25 bps. Though, RBI is trying to take off excess liquidity from market by increasing these rates but in turn, it is also wiping out the funds required for day to day running of production industry. Well, it is a sheer example of demand and supply mismatch where RBI should focus upon. Real estate industry is already suffering the burden of higher rates for fund borrowing coupled with soaring input costs. We have also seen how seriously both manufacturing and mining sectors growth has dipped. The industrial output in August rose a lower than expected 4.1% from the year earlier. It is evident that RBI’s monetary steps are not showing results until they are supported by some fiscal assurances.
What we urge to the apex bank is to remove supply side hiccups. We require to pace up production and manufacturing to support supply in the market and in turn government should work towards improving industrial climate and business environment, stimulating investment and developing industry-relevant skills. It is our strong recommendation to RBI not to increase rates further as it will not help industry come out of the quicksand, rather it will further burden it and may finally become a reason for economic collapse.
While the RBI has hiked policy rates by 25bps, the indication of pause in the rates going forward has fulfilled hopes that the credit cycle has in all probability peaked. Likelihood of further rate hikes is relatively low keeping in view that inflation would decline beginning December 2011, that past monetary policy actions have started taking effect and developments in the global scenario has started affecting growth. Accordingly the RBI has revised the baseline projection of GDP growth for 2011-12 to 7.6% from 8% in the earlier policy. The baseline projection for WPI inflation for March 2012 has been kept unchanged at 7%. Given this policy stance, we expect rate sensitive sectors to perform better henceforth. However given the current liquidity environment, the deregulation of savings account rates would likely move up the interest cost curve for the entire banking system and the end borrowers. To that extent the policy may lead to hikes in bank base rates, increase interest rate volatility and also deal a blow to margins of banks with high savings deposits.
Aneesh Srivastava, Chief Investment Officer, IDBI Federal Life Insurance Company:
Ultimately, RBI has finally started reacting on signs of retardation in domestic growth, global macro economic uncertainties and high base effect of inflation that would kick in from December 2011. Hence, it has although increased rates by 25 bps, indicated that it would not increase policy rates in coming policy. We feel that, coupled with savings bank deregulation, there would be some pass through of higher costs to customers and hence would have impact on investment and consumption. This gets reflected in sharply revised GDP growth projections of RBI. Ball would now be in the Government’s court to address fiscal policy and supply side issues to tackle the situation from here on.
Banks with low CASA would marginally benefit as currently they are wholesale funded and hence they can garner saving account through competitive pricing and there average cost of borrowings would come down. Banks with high CASA with large ticket deposits would be impacted the most till system achieves new equilibrium.
Shriram Ramanathan, Portfolio Manager, Fixed Income, Fidelity Worldwide Investment:
The RBI delivered on market expectations by hiking rates by 25bps. However, it also explicitly heralded the end of the current rate hiking cycle, stating that the likelihood of another rate action in December is relatively low. In a clear shift of stance, the RBI has elevated the importance of economic growth slowdown (especially investments) in its policy priorities, and has also recognized that despite high headline inflation, recent underlying inflation momentum indicators have moderated in response to its past actions. The announcement provides much needed stability to the bond markets and medium term fixed income investors.
J. Moses Harding, Head, Global Markets Group, IndusInd Bank:
Now, there is build up of expectation that headline inflation and GDP growth trend will more or less meet around 7.5% by March 2012. This will enable RBI to shift operative policy rate from Repo rate to Reverse Repo rate by early 2012. It is premature to think of shift into rate cut mode at this stage given the complexities both in domestic and external sectors. The pressure on inflation will continue to stay valid driven by domestic supply side concerns and import content on higher input costs. RBI has also stressed its concerns on weak rupee diluting its monetary actions and we could see RBI arresting run-away weakness in rupee. The next couple of months will be critical on the way forward and it is important to see a clear downtrend in headline inflation without mindful of short term pressure on growth.
There will be stability in money (and fixed income) market. While 1-3M rates will continue to stay at elevated levels (tracking overnight MIBOR at 8.55-8.65%), rates are expected to soften beyond 3M tenor. This expectation is based on the belief that call money rate will soften into 7.50-7.75% range in Q4 of FY12 on shift of operative policy rate from 8.5% to 7.5%. Thereafter, if all goes well on the inflation front, we might see shift of operative policy rate to 7% by June 2012. There will be good investor appetite in 1Y bond above 8.5% and 10Y bond above 8.75%; thus setting up short term range play at 8.25-8.5% in 1Y and 8.50-8.75% in 10Y with short term target at 8% and 8.25% respectively. OIS rates will trend down and expected to stay within 7.90-8.15% in 1Y and 7.10-7.35% with short term target at 7.75% and 7% respectively.
RBI’s stance on rupee would give good comfort to importers but RBI would not mind rupee stability around 50 if downtrend in commodity prices is established. Having said this, there is no sign of dilution in risk aversion; dollar will stand to gain till economic recovery is sighted in advanced economies. We now watch 49.35-50.00 range with overshoot limited to 49.00-50.35. Importers can stay away allowing marginal gains into 49.35-49.00 (to buy 3-12M forward dollars) while exporters to absorb weakness into 50.00-50.35 (to sell 3M forward dollars). There is no change in view in FX premium; while there is dilution in interest rate play, exchange rate play will kick in to support downtrend. Let us watch consolidation in 3M at 4.50-5.5% and 2.75-3.25% in 12M.
The downward pressure from domestic cues seems arrested and need to set focus on external cues. It is back to consolidation play at 5,000-5,200 with short term range at 4,850-5,350. It will be traders market for the next couple of months and strategy would be to buy 5,000-4,850 and sell 5,200-5,350. Strategic investors can absorb extended weakness into 4,850-4,700.
Kislay Kanth, Senior Director, Research, MAPE Securities:
We believe that the RBI provided adequate comfort to analysts and investors today by (indirectly) mentioning that growth will become the priority after this round of rate hike. Moreover, deregulations of the savings bank interest rates will adversely impact some smaller-midsize PSU banks and can benefit some stronger private sector banks which have strong distribution network and better handle on their assets-liabilities.
The RBI has also deregulated the savings bank interest rates for deposits over ` 1,00,000 with immediate effect, which will enable banks to compete for savings account based on interest rates and service quality combined. In our opinion, this could adversely impact some PSU banks which may not be as competitive with relatively wealthier clientele as some of the better managed ones. We have a buy on BOB and PNB while we are NEUTRAL/NEGATIVE on BOI and UNBK
The RBI expects inflation to come off by Dec 2011 to its target of 8.0% and 7.0% by Mar 2012. It should moderate further in 1H FY2013 due to continued softening of commodity prices especially the Crude Oil and global Food prices. The exchange rate will be a critical factor to monitor in future. The RBI is very cautious on the global market conditions, where global growth rates are coming off and performance of Indian exports can get impacted in future. The contagion impact of problems in the EU and the US will be monitored by the RBI.
Tarun Kataria, CEO India, Religare Capital Markets:
An important aspect of this credit policy was the savings rate deregulation which will help monetary policy transmission. That said, it adds additional uncertainty around other savings rates which will need attention. What is also noteworthy is RBI going to the extent of saying that the likelihood and need for further rate hike is not significant. This should bring much needed certainty in policy trajectory and could potentially help improve the investment climate.
D. K. Aggarwal, CMD, SMC Investments and Advisors:
Both market and investors were looking at this credit policy meeting to get the sense of approach that RBI would take from here onward as a hike of 25 bps of Repo rate was very much discounted. RBI has clearly indicated that the further hike is not warranted and inflation would start moderating starting December 2011. Clearly the undertone of RBI is much softer this time and it has shown concern over the moderating growth and investments. The deregulation of saving rate and waiver of prepayment charge is expected to increase competition among banks. The deregulation of saving rate is expected to put pressure on interest rates and would increase the cost of deposits for banks.
Devendra Kumar Pant, Director, Fitch Ratings India:
As expected RBI raised policy repo rate by 25 basis points to 8.5% and trimmed down FY12 GDP growth projection to 7.6% from 8.0%. However, WPI based inflation target for March 2012 is kept unchanged at 7.0%. The policy detailed out various developmental and regulatory policies measures ranging from interest rate to financial markets and stability to credit delivery and regulation.
While RBI has suggested that the likelihood of a rate hike in December policy review is relatively low, it would largely depend on movement of inflation between now and December. While development in Euro area and the US are pointing towards slowing demand and commodity prices, Middle East developments have kept Brent crude prices at around 30% premium from WTI crude. Inflation trajectory would largely depend on movement of Brent crude prices post Gaddafi.
Developmental and regulatory policies measures will help in strengthening of Indian financial markets.
RICS:
Since the last RBI meeting in September this year where the key repo rate was raised by a quarter percentage point to 8.25%, there has been increasing speculation that the RBI may signal a pause in the monetary tightening cycle. This has been indicative by the decision of a number of other emerging market central banks to do the same and, in some cases, actually cut rates.
However, policymakers are continuing to grapple with exceptionally high inflation rates, which have once again resulted in the Central Bank to revise the repo rate to 8.50% and the reverse repo rate to 7.5%, with the CRR remaining at 6% in an attempt to provide an anchor to inflation expectations.
Even with the rate hike, the residential real estate sector is likely to remain relatively resilient in the face of more moderate pace of economic growth and the higher cost of borrowing. The JLL REIS third quarter numbers for the top seven metros indicate prices are broadly stable at recent highs and activity levels also essentially flat. Also, in spite of the relatively high cost of borrowing the credit growth for housing continues to post strong year-on-year gains.
However, there are a few signs that confidence, particularly amongst developers, may be slipping with a marginal drop in the number of new launches (30.3k units as compared to a four quarter average of 44.4k). In the case of commercial real estate, particularly office space, even though economic growth projections have slowed down to 7% - 7.5%, demand is likely to remain firm, helping underpin rental growth. However, the rate revisions may result in these trends moderating over the course of the coming months.
Hemant Kanoria, Chairman and Managing Director, SREI Infrastructure Finance:
In the build-up to the announcement of the Q2FY12 monetary policy, enough hints were dropped by the central bank that another rate hike was imminent. Thus, with inflation persistently remaining way above the comfort level, the RBI’s decision to increase repo and reverse repo rates by 25 basis points each (from 8.25% to 8.5% and 7.25% to 7.5% respectively) has been on expected lines.
Industry is truly concerned about the policy rate hikes and their adverse impact on the investment sentiment. Our country needs huge investments in infrastructure and half of that is expected to come from the private sector. I do not foresee how private sector will be able to mobilize resources from domestic sources in this scenario. The recent steep depreciation in the rupee has also pushed up our import bill which implies that inflation in India is no longer fuelled by domestic factors alone. The prices of key inputs like oil and coal are also to go up due to the rupee depreciation. Government, in conjunction with RBI, needs to immediately correct it, otherwise it will further push up inflation and lower GDP growth.
We expect this to be the final rate hike in this cycle. Keeping in mind how stressed industry is, we sincerely hope that this is not the final straw that broke the camel’s back.
Sanjiv Saddy, Executive President - Corporate Affairs, EMAAR MGF Land:
RBI has again increased repo and reverse repo rates by 25 bps. Though, RBI is trying to take off excess liquidity from market by increasing these rates but in turn, it is also wiping out the funds required for day to day running of production industry. Well, it is a sheer example of demand and supply mismatch where RBI should focus upon. Real estate industry is already suffering the burden of higher rates for fund borrowing coupled with soaring input costs. We have also seen how seriously both manufacturing and mining sectors growth has dipped. The industrial output in August rose a lower than expected 4.1% from the year earlier. It is evident that RBI’s monetary steps are not showing results until they are supported by some fiscal assurances.
What we urge to the apex bank is to remove supply side hiccups. We require to pace up production and manufacturing to support supply in the market and in turn government should work towards improving industrial climate and business environment, stimulating investment and developing industry-relevant skills. It is our strong recommendation to RBI not to increase rates further as it will not help industry come out of the quicksand, rather it will further burden it and may finally become a reason for economic collapse.
Rajrishi Singhal, Head, Policy & Research, Dhanlaxmi Bank:
RBI’s rate hike of 25bps is in line with our expectations. Given the downgrade of growth target, and RBI’s assertion that its monetary policy is working, seems to suggest that the central bank might have reached the end of its monetary tightening cycle. As expected, RBI has started weighing the weakening global demand scenario along with the weakening demand pressures in the domestic economy and has, therefore, hinted at no rate action in December. We feel this is a good sign as slowing growth is starting to impact services too. As per RBI’s macro-economic review released yesterday, slowing industrial activity has impacted corporate investments and services too, mainly construction and community, social and personal services. The slowdown in pipeline corporate investments can also jeopardise GDP growth in FY13 and therefore the RBI stance augurs well for the economy.
While, as a general rule, deregulation of interest rates is a welcome development, freeing up rates on only one side of the balance sheet might exacerbate some existing distortions. For one, deregulation of rates on deposits without any attendant action on administered rates on the loan side could impact profitability. In addition, deregulation of deposit rates is only likely to increase costs for most banks, especially those with a high percentage of Current-Account-Savings-Account deposits. As such, the market-allocated premium to banks with high CASA ratios might witness some re-rating.
Shanu Goel, Senior Research Analyst, Bonanza Portfolio:
RBI announced its second quarter monetary policy review today. In line with the market expectations, it raised the repo rate and reverse repo rate by 25 basis points. In a landmark decision RBI decided to deregulate savings bank deposit interest rate with immediate effect, subject to few conditions. In a change of stance, RBI gave due importance to the slowing growth rate even though mentioning concerns about persistent inflation. In its own words “inflation rate is likely to fall in December 2011 and then continue down a steady path to 7% by March 2012, and hence the likelihood of a rate action in the December mid quarter review is relatively low”. Hence it was a welcome change in stance that the market observed in the credit policy announcement.
The rate hikes were as per the market expectation and after an initial jittery reaction, Indices resumed to trade in flat to conservative fashion post the policy announcement. Banks witnessed sharp fall on adverse sentiments attached with saving deposit rates deregulation. It was a welcome change to dovish stance by the RBI since market men were resenting periodic hike in interest rates of late. With the possibility of no imminent hike in interest rates round the corner, investors can start accumulating interest rate sensitive fundamentally strong stocks. Nifty is likely to consolidate within 4,950-5,200 range.
Ashutosh Khajuria, President (Treasury), Federal Bank:
The 25 bps hike in repo and reverse repo is in line with expectations. More importantly, there are indications that this is the last hike by the RBI for the year. A 25 bps hike would not affect corporate borrowers much, but could have an adverse effect on retail borrowers, it the hike is passed on to them.
RBI has made significant announcements to improve liquidity in the bond markets and have provided a clear roadmap for the same. At present the IRF is available only on ten year bond with a notional coupon. Adding shorter tenures will boost the bond market as shorter bonds can also be hedged by way of IRF.CDS is an active instrument to hedge the Credit risk in corporate debts/debentures. Introduction of CDS will enhance the liquidity in the bonds market. These measures will enhance the liquidity in the bond market and different tools for interest rate risk management will emerge.
Sanjay Kabra, Chief Financial Officer, Sunil Mantri Group:
Inflation has not relented despite 12 rate hikes by RBI. Higher threshold rates correspondingly increase the hurdle rates for economic growth. I am not optimistic that the 13th nominal rate hike of 0.25 % will be able to ward off inflationary forces. Rate hikes are threatening growth and probably counterproductive now. Monetary policy alone cannot address inflation and the government needs to address the underlying economy. The real estate sector is reeling from unabated borrowing costs .The saving grace is the robust 20% housing loan growth which is providing buoyancy to the demand end. The realty players as well as buyers are both bearing the brunt of constant rate hikes. And it will be fair to expect some respite going forward.
RBI’s rate hike of 25bps is in line with our expectations. Given the downgrade of growth target, and RBI’s assertion that its monetary policy is working, seems to suggest that the central bank might have reached the end of its monetary tightening cycle. As expected, RBI has started weighing the weakening global demand scenario along with the weakening demand pressures in the domestic economy and has, therefore, hinted at no rate action in December. We feel this is a good sign as slowing growth is starting to impact services too. As per RBI’s macro-economic review released yesterday, slowing industrial activity has impacted corporate investments and services too, mainly construction and community, social and personal services. The slowdown in pipeline corporate investments can also jeopardise GDP growth in FY13 and therefore the RBI stance augurs well for the economy.
While, as a general rule, deregulation of interest rates is a welcome development, freeing up rates on only one side of the balance sheet might exacerbate some existing distortions. For one, deregulation of rates on deposits without any attendant action on administered rates on the loan side could impact profitability. In addition, deregulation of deposit rates is only likely to increase costs for most banks, especially those with a high percentage of Current-Account-Savings-Account deposits. As such, the market-allocated premium to banks with high CASA ratios might witness some re-rating.
Shanu Goel, Senior Research Analyst, Bonanza Portfolio:
RBI announced its second quarter monetary policy review today. In line with the market expectations, it raised the repo rate and reverse repo rate by 25 basis points. In a landmark decision RBI decided to deregulate savings bank deposit interest rate with immediate effect, subject to few conditions. In a change of stance, RBI gave due importance to the slowing growth rate even though mentioning concerns about persistent inflation. In its own words “inflation rate is likely to fall in December 2011 and then continue down a steady path to 7% by March 2012, and hence the likelihood of a rate action in the December mid quarter review is relatively low”. Hence it was a welcome change in stance that the market observed in the credit policy announcement.
The rate hikes were as per the market expectation and after an initial jittery reaction, Indices resumed to trade in flat to conservative fashion post the policy announcement. Banks witnessed sharp fall on adverse sentiments attached with saving deposit rates deregulation. It was a welcome change to dovish stance by the RBI since market men were resenting periodic hike in interest rates of late. With the possibility of no imminent hike in interest rates round the corner, investors can start accumulating interest rate sensitive fundamentally strong stocks. Nifty is likely to consolidate within 4,950-5,200 range.
Ashutosh Khajuria, President (Treasury), Federal Bank:
The 25 bps hike in repo and reverse repo is in line with expectations. More importantly, there are indications that this is the last hike by the RBI for the year. A 25 bps hike would not affect corporate borrowers much, but could have an adverse effect on retail borrowers, it the hike is passed on to them.
RBI has made significant announcements to improve liquidity in the bond markets and have provided a clear roadmap for the same. At present the IRF is available only on ten year bond with a notional coupon. Adding shorter tenures will boost the bond market as shorter bonds can also be hedged by way of IRF.CDS is an active instrument to hedge the Credit risk in corporate debts/debentures. Introduction of CDS will enhance the liquidity in the bonds market. These measures will enhance the liquidity in the bond market and different tools for interest rate risk management will emerge.
Sanjay Kabra, Chief Financial Officer, Sunil Mantri Group:
Inflation has not relented despite 12 rate hikes by RBI. Higher threshold rates correspondingly increase the hurdle rates for economic growth. I am not optimistic that the 13th nominal rate hike of 0.25 % will be able to ward off inflationary forces. Rate hikes are threatening growth and probably counterproductive now. Monetary policy alone cannot address inflation and the government needs to address the underlying economy. The real estate sector is reeling from unabated borrowing costs .The saving grace is the robust 20% housing loan growth which is providing buoyancy to the demand end. The realty players as well as buyers are both bearing the brunt of constant rate hikes. And it will be fair to expect some respite going forward.
UNICON:
RBI has clearly indicated a threat to domestic economy from uncertain global macro-economic environment. This will affect the composition of capital flows from developed economies. Also, domestic inflation continues to remain high and is much above the comfort zone of RBI. To manage inflation within economy RBI has pointed out at fiscal consolidation in the country is necessary. Going forward, RBI is likely to pause interest rate hike, though it will remain anti-inflationary depending on inflation trajectory, which, in turn, will be determined by trends in domestic growth and global commodity prices. The hike is likely to be transmitted in the banking sector as it may face challenges in retail finance & asset quality. Banks margins would be affected with saving banks deregulations. But the deregulation will increase the disposable income in the hands of people especially in rural areas. Additionally Real estate, Auto, Infrastructure would be impacted by high interest rate regime.
(source: myiris, moneycontrol)
