Key Highlights:
Repo rate raised by 50bps to 7.25% with immediate effect.
o Repo rate to be the operative rate i.e. a single independently varying policy rate
Reverse Repo rate raised by 50bps to 6.25% with immediate effect.
Reverse Repo rate pegged at a fixed 100bps below repo rate with immediate effect.
CRR & SLR rate kept unchanged at 6.0% & 24% respectively.
Bank’s savings account rate increased by 50bps to 4.0% from 3.5% with immediate effect.
Introduced Marginal Standing Facility (MSF) borrowing upto 1% of NDTL for banks effective May 7th, 2011.
o MSF pegged at 100bps above Repo rate i.e. 8.25%
Enhancement in provisioning norms for banks and restricting their investments to 10% of net worth in Liquid Funds
Policy Stance:
The monetary policy stance of RBI has shifted to tightening mode since the start of 2010, owing to rising inflationary pressures. The RBI increased cash reserve ratio by 100 basis points, reverse repo rate by 250 bps and the repo rate by 200 bps so far. In the monetary policy announced today, the policy rates are further hiked by 50 bps. The main factors shaping the monetary policy for 2011-12 has been - rising global commodity prices, continuous rise in headline & core inflation and targeting the robust demand. The monetary policy statement for 2011-12 highlights the shift of RBI stance from a calibrated approach of policy tightening to aggressive inflation targeting. The factors contributing to inflation has shifted from food and
primary articles to power group and non-food manufactured products, indicating a more generalized inflationary environment. Apart from high commodity prices, the RBI has also indicated strong demand as a factor leading to inflation in domestic manufactured products. Persistently high inflation throughout the year and rising inflationary expectations has prompted the RBI to adopt a hawkish stance in the monetary policy. The monetary policy is based on the premise that, elevated inflation pose significant risk to future growth, thus inflation control should take precedence even at the cost of growth in the short-run.
Projections by RBI:
In its projections/estimates for FY12, RBI has highlighted number of downside risk factors to economic growth as well as upside risk factors to inflation. And, in this trade-off, inflation takes the center-stage that bears short term cost by way of lower growth. Given the persistent ‘anti-inflationary’ policy stance by RBI, it has lowered its growth projection for a) money supply to 16% with expectation of lower deposit growth of 17% and b) credit growth to 19% as rising lending rates could slowdown the credit off-take. Lower projections by RBI suggest further rate
tightening, which may impact the current growth momentum of monetary aggregate variables.
Inflation: Reining inflation taking precedence…
Inflation has been a primary economic concern for RBI, which is driven by structural and transitory factors. RBI expects inflation to be at elevated levels in the first half of the year, before gradually moderating to 6% levels by March2012. In the medium term, factors that can accentuate inflationary pressures are expected revision of domestic fuel prices, continued high prices of crude oil & global commodities, and rising demand side pressures as evident from core inflation currently surpassing 7% mark. With such ominous factors, the behaviour of monsoon would be a critical factor in shaping the inflation expectations. However, inflation may have an
asymmetrical relation with monsoon as the case was last year. In this backdrop, there is a possibility that inflation may range closer to 8-9% band and it may touch double digit figures, if fuel prices are increased by 5-10% over the quarter, adding about 80-100bps to headline numbers. Therefore, it is clearly evident that inflation in the first half may hover at concerning levels. Gradually by H2 FY12, the impact of policy action may moderate growth and hence abate demand side pressures on inflation. Also, if global commodity prices and crude oil prices ease by then, inflation could reasonably moderate to around 7.5% levels, which would still be higher than RBI’s target of 6.0% for the year
GDP Growth: Higher downside risks emanating…
With inflation management taking precedence, the economic growth is vulnerable to moderation from 8.6% in FY11 to 8.0% levels projected by RBI for FY12. Effects of rate hike are imminent with moderation in investment activity and decline in the business expectations index. IIP growth has fallen to 7.8% for the period April-Feb 2010-2011 from 10.7% in the first half of last year. Also, we have observed slackening in investment spending and slowdown in capital goods production, which is witnessing more than 10% degrowth over the last 3 months. Moreover, transitory impact of policy on demand may also moderate consumption side of economic growth. Besides, crude above $120 a barrel may deteriorate the GDP Growth: Higher downside risks emanating… With inflation management taking precedence, growth. Besides, crude above $120 a barrel may deteriorate thefiscal health of the economy. So maintaining fiscal prudence would be challenged with low budgeted subsidies. In such a scenario, RBI’s baseline projection of GDP growth of 8% seems questionable. RBI has also given GDP growth range of 7.4%-8.5% in the monetary policy document that forms a case of downside risk factors impeding the economic growth to the lower band of projections.
The aggressive tightening of 50 bps had a slightly negative impact on the debt markets, the markets seems to have been factoring-in a hike of 25 bps. In reaction to the policy announcements, the yields across the maturity curve moved up by 10 bps – 25 bps. The inflation outlook given by RBI has also been negative for the debt markets. The RBI has expressed its reservations towards the fiscal deficit number declared by the government. The
consistently high oil & fertilizer prices may increase the subsidy burden and in turn the fiscal deficit. The rise in fiscal deficit may result into additional government borrowing that will not only impact the G-Sec yields but also have a crowding out effect on private borrowing. In this backdrop, 10yr benchmark yield has moved closer to 8.23% levels from its previous close of 8.14%. Going forward, the longer end of the yield curve will continue to take cues from the inflation numbers and given the inflationary outlook by RBI, the longer end can remain volatile
with an upward bias. The shorter end of the yield curve moved up by 10 bps – 25 bps post the policy announcement, as the hike in policy rates was higher than expected by the markets. However, the short term yields have moved down sharply from the highs of Mar’11 as the liquidity situation improved. Going ahead we do not expect yields of short maturity papers to move down significantly from current levels as the RBI has indicated its preference towards a
low liquidity scenario to ensure better transmission of monetary policy. Strategy:
As indicated by RBI, inflation clearly remains a threat till first half of FY12, which suggests hawkish policy stance and further tightening. In such a scenario, bond yields are likely to trade with upward bias and hence it is advisable to invest into funds with low duration and accrual based strategy. Low duration lowers volatility and also helps in realigning the portfolio efficiently. We continue to recommend investors to use a judicious mix of short term income funds (STIF) and fixed maturity plans. We recommend ultra short term funds and FMPs for conservative investors who are averse to volatility
Other Key Announcements:
Provisioning on banks' sub-standard loans hiked to 15% vs 10%.
Additional 10% provision on unsecured sub-standard loans.
25% provision on secured portion of up to 1-yr doubtful loans.
40% provision on secured portion of 1-3 yr doubtful loans.
2% provision on recast loans in standard assets for 1st 2-yr.
Draft norms on new bank licenses being finalized.
Bank loans to micro finance cos Apr 1 onwards to be priority sector.
To issue norms on credit default swaps shortly.
Short sale period in gilts extended to 3-mo vs 5-day now.
Disclaimer
This document has been prepared for your information only. In rendering this information, we assumed and relied upon, without independent verification, the accuracy and completeness of all information that was publicly available to us. The information has been obtained from the sources we believe to be reliable as to the accuracy or completeness. This should not be construed as an offer to sell or buy the securities and the information contained herein is meant for the recipient only and is not for public distribution. This information is given in good faith and we make no representations or warranties, express or implied as to the accuracy or completeness of the information and shall have no liability to you or your representatives
resulting from use of this information. We shall not be liable for any direct or indirect losses arising from the use thereof and accept no responsibility for statements made otherwise issued or any other source of information received by you and you would be doing so at your own risk. The investment as mentioned in the document may not be suitable for all investors. Investors may take their own decisions based on their specific investment objectives and financial position and using such independent advisors, as they believe necessary. Investment in Mutual Funds is subject to market risks. You are advised to carefully read the offer document and go through all
the Risk Factors mentioned in the offer document issued by the Mutual Fund before investing.
Thanks & Regards ,
Priyanka Kothari ,
Client Service Associate .
No comments:
Post a Comment