monetary policy review held on 29 January 2010, the RBI has kept the
key policy rates i.e., the Bank rate, Repo rate and Reverse Repo rate
unchanged at 6.0%, 4.75% and 3.25% respectively although, the Cash
Reserve Ratio (CRR) was hiked by 75 basis points (1 basis point is
1/100 of a percentage). Even though the hike in CRR was expected, the
markets were expecting an increase of 50 basis points (bps).
this hike will
implemented in a two staged manner. In the first stage, an increase of
will be effective from 13 February 2010, followed by the next stage of
of 25 bps effective the fortnight beginning February 27, 2010. The hike
will absorb the liquidity from the system by Rs. 36,000 crores or close
Third Quarter Monetary policy
review held on 29 January 2009 by the Reserve
Bank of India (RBI)
key policy rates i.e., the Bank rate, Repo rate and Reverse Repo rate,
at 6.0%, 4.75% and 3.25% respectively
- The CRR was hiked by
75 bps while the markets were expecting an increase
of 50 bps
- The CRR hike will
absorb Rs. 36,000 crores or close to US$8 billion from
Wholesale Price Index
(WPI) inflation forecast has now been raised to 8.5% from 6.5% for the
year ending March 2010 (FY10).
- The GDP
growth forecast for
FY10 has been raised to 7.5% from 6.0%
non-food credit growth
projection for FY10 has now reduced to 16 % from 18%
Equity market reactions
markets, represented by SENSEX, have lost more than 7% or close to
1,200 points since January 15 amid high concern of rate hikes by
central banks in India, China and the global uncertainty. The markets
had more or less incorporated the effect of hike in CRR.
policy declaration has eased the concern of the market and the SENSEX
recovered from the day’s low of 15,982 to 16358 after the
We believe that it is a good time to
the market as the index is at 16,300 levels and we expect SENSEX to
touch 20,500 in 2010, which can get you about 25% returns.
performance of SENSEX and five other sectoral indices since 31 December
2009 to 29 January 2010. All the six indices have declined in value.
SENSEX has lost 6.3% Year-to-Date (YTD); however, the BSE FMCG index,
BSE Power Index and BSE Bank index have lost lower in comparison to
SENSEX. The BSE FMCG index has lost the least at 2.37%, whereas the BSE
Real Estate index has lost the most at 9.2%.
Performance of BSE Indices from 31 December 2009 till 29 January 2010
run-up to the
monetary policy, RBI was under tremendous pressure to balance nascent
growth of the economy and control the inflation levels. The WPI
inflation for December 2009 (as of 15 January 2010) was unexpectedly
high at 7.31%, which was much higher than the RBI’s
projection of 6.5% for the FY10.
Index (CPI) – Industrial workers inflation for November 2009
was at 13.51%. Such high level of consumer price inflation was last
seen in 1998. Generally in the past, there was not much gap in the
level of WPI and CPI inflation, but since early 2009, the gap between
the WPI and CPI inflation levels has increased tremendously and this
gap is a cause of worry for the RBI. This can be seen in the Chart 2.
One of the
for the increase in gap between the indices is the rise in food prices
on account of poor monsoon in 2009. The food inflation for the week
ended 16 January 2010 is at 17.4%. Food articles have a 15% weightage
in the WPI, whereas the weightage in the CPI (for Industrial Workers)
is much higher at about 46%. We feel that food inflation would moderate
from mid-2010 onwards, due to the higher base in the corresponding
period a year back.
of liquidity in the system tends to put an upward pressure on
inflation. A higher than normal outstanding reverse repo volume would
indicate surplus liquidity in the banking system. As seen from chart 3,
the reverse repo volumes are lower than their long-term average
(indicated by the red line). Based on this information, we feel that
excess liquidity is not the cause for the high levels of inflation.
feels that the
high food inflation can lead to high levels of inflation in the other
parts of the economy (source: Third quarter review of Macroeconomic and
Monetary Developments for 2009-10). Based on this, the RBI has now raised the
projection for WPI inflation to 8.5% from 6.5% in the previous quarter
monetary review. However, the
RBI expects the WPI inflation to moderate from July 2010, under the
assumption of normal monsoon and global oil prices.
Chart 2: Emergence
in between the
growth of two inflation
98% of the net
market borrowing program of the Central Government for FY10 already
complete (as of 28 January 2010) and even with a CRR hike of 75 bps,
there is enough liquidity in the system to cater to the needs of the
borrowings by the commercial sector for remaining months of 2010.
shows that the
aggregate deposit growth rate and commercial credit growth rate has
fallen in 2009. Commercial credit growth rate has fallen at a much
faster rate than the aggregate deposit growth rate. However, the RBI
expects the aggregate deposits of scheduled commercial banks to grow by
17%. Due to lower credit outflow in 2009, RBI has revised the adjusted
non-food credit growth projection for FY10 to 16% from 18% in the
previous quarter monetary review.
In the first
quarters of FY10, the real GDP growth rate shot up from 6.1% in the
first quarter to an unexpected 7.9% in the second quarter, driven by
revival in industrial growth and services sector. The RBI expects the
third quarter GDP growth rate to reflect the complete effect of failure
in the summer crop due to deficient rainfall.
near zero growth in agricultural production for FY10 and continued
recovery in industrial production and services sector, the RBI has
increased its forecast for GDP growth to 7.5% from 6.0% for FY10.
3: Reverse Repo Volumes
following key risks that can make its forecast on GDP and inflation
- A downturn in global
sentiment, not only affects our exports but also the domestic
- If the global
turns out to be stronger than expected, then the oil prices may
increase sharply and can stoke global inflationary pressures
- Expectations of low
domestic inflation depends on lower food prices and if rainfall is
inadequate in 2010, then the increase in food prices will continue to
- Economic growth and
persistence of excess liquidity in the system will continue to fuel
Commercial Credit and Aggregate Deposits Growth Rates
Banking Sector - Dealing with Inflation and interest rate hike fears
Faster-than-expected Recovery Leads to an Unexpected Rate Hike!
Inflation Accelerates to 7.31% in December
Research Views: What & Where to Invest In 2010