(source: myiris)
India’s Central Bank will be meeting on Friday, Dec. 16, 2011 to review its monetary policy. The market participant eagerly waiting for what the RBI will do in its meeting amid slowing growth and continue elevated levels of inflation. Industrial production contracted by 5.1% in October, while inflation remained above 9% for November to 9.11%. Following are the collated views of experts on the RBI policy.
Indusind Bank:
RBI is expected to stay with pause mode with the risk of back into hawkish stance if rupee extends its weakness beyond 56. Therefore, expectation of CRR cut now (and rate cut thereafter) has shifted to risk of rate hike if rupee continues its free fall. RBI is expected to keep CRR and policy rates unchanged and may not sound dovish on the way forward. RBI is expected to stay cautious on inflation (and rupee woes) and look for improvement in the external sector to address growth issues.
Indranil Pan, Chief Economist, Kotak Mahindra Bank:
Going forward, we expect headline WPI to move down to 7.60-7.80% in the next month and end the year at around 6.50%. With November WPI staying above 9% and with the non-food manufactured inflation moving higher, talks of CRR cut as early as Dec 16, 2011 mid-quarter review of the RBI seem misplaced. Further, given the emerging developments on the global side, the RBI would probably be keen to keep its CRR ammunition dry and use it only in the most stressed conditions of large dollar sales coinciding with stress in the global financial markets.
However, it could become increasingly difficult for the RBI to continue to infuse liquidity on a continuous basis through the OMO and hence, we might see the RBI cutting the CRR by 50 bps by Jan 24, 2012. This is likely to infuse around ` 300 billion of liquidity in the system and would support currency intervention of around USD 6 billion. Further, we expect the RBI to start reducing the repo rate by the first policy date in FY2013E. For this policy, the RBI communication is expected to be more dovish compared to the previous policy. Further, the RBI could be seen to announce an OMO calendar to address the currently high structural banking system liquidity deficit.
Morgan Stanley Research:
We expect RBI to keep the repo and reverse repo rate unchanged on December 16, in line with its guidance provided in the monetary policy meeting on Oct 25. Since the last meeting, WPI inflation has been as per expected trajectory and global commodity prices have also been range-bound warranting RBI to maintain its guidance. However, given the persistence of stress in inter-bank liquidity especially since November we see a 60% probability of cash reserve ratio cut of 50bps.
A combination of high and persistent inflation, slow pace of policy reforms to boost investment, graft-related investigations, weak global capital markets and a weak global economy have begun to weigh on India’s growth trend. We are increasingly concerned about the duration of the growth slowdown. As we have been highlighting, a weaker growth trend lasting for more than 3-4 quarters could make the cycle more harmful, with a major rise in non-performing weaker assets leading to risk aversion in the domestic banking sector.
Goldman Sachs:
The higher-than-expected print suggests to us that the RBI will keep all rates on hold on December 16. While we continue to believe that sequentially falling inflation and much weaker growth will prompt the RBI ease monetary policy, our expectation of the sequence of easing remains first injecting liquidity through open market operations (which the RBI has been doing), then cut the reserve requirement ratio of banks in January, followed by repo rate cuts in March 2012. As such, we assign only a 30% probability to a cash reserve ratio cut on December 16. We continue to expect the RBI to cut policy rates by an above-consensus 150 bps in 2012.
Yes bank:
While undoubtedly headline November inflation offers some respite, the sharp pace of moderation in economic activity as IIP contracted by 5.1% in October and the depreciation in Rupee have negated the market sentiment. In its monetary policy on 16th Dec-11, we expect the RBI to maintain the repo rate at 8.50%, but definitely sound less hawkish in its statement. Despite the moderation in November, inflation continues to remain significantly above the comfort level of RBI, especially core inflation.
With core inflation also coming under pressure because of Rupee depreciation, we believe that the anti-inflationary stance of the central bank will remain intact. We believe OMOs will be the preferred route for RBI to alleviate the liquidity stress in the economy rather than a cut in CRR, as CRR essentially is a monetary policy tool and not a liquidity tool.
Nomura:
We expect inflation to fall more sharply in the next few months to reach around 7% in March 2012, primarily due to base effects and lower commodity prices, even though the rupee’s depreciation may partly offset such forces. Overall, we expect WPI inflation to average 8.8% y-o-y in FY12 (year ending March 2012) versus 9.6% in FY11. On the policy front, we maintain our call that the RBI will keep its policy rates on hold at its policy meeting on 16 December as core inflation remains elevated.
Rohini Malkani, Economist, Citi India:
In its 25 Oct policy, where it raised rates by 25bps, the RBI acknowledged that although “growth risks are undoubtedly significant changing the policy stance when inflation is still far above the tolerance level, entails risks to its credibility”. However, with growth taking a severe beating, and signs of slowing inflation, the key issue determining any policy measures in its 16 Dec meeting is the RBI’s inflation tolerance level.
Our View - Need Policy Action at all Levels to Stem Decline in Growth. While our base case is that the RBI will begin easing in 1QFY13, we believe that the poor macro data as reflected in (1) sub 7% GDP growth, (2) Contraction in IIP, (3) slowing PMI and (4) weak sectoral trends coupled with signs of abating inflationary pressures deserves some monetary stimulus. We place the odds at 30% for advancement of the easing cycle.
Kislay Kanth, senior director, research, MAPE Securities:
There is a lot of expectations from the market on a CRR cut and a Rate Pause stance from the RBI on Friday. Now it looks a bit difficult to foresee whether they will deliver on these concessions to the industry. As far as weekly inflation rates are concerned, food and primary articles inflation is genuinely slowing down, its just that the weight in overall WPI is low for those articles and stubbornly high fuel inflation is not helping. Part of the inflation is also due to the currency rates depreciation, which increases the costs of most raw materials, metals, fuel and some food products as well.
The market could stay nervous in the anticipation of a move from the RBI. However, if the RBI stance is still aggressive on Friday, we could see a big negative impact on the markets in the following week.
