Monetary Policy Review for third
quarter of the financial year 2010-11
- Repo rate increased by
basis points (bps) from
6.25% to 6.50% with immediate effect
repo rate increased by 25
bps from 5.25% to 5.50% with immediate effect
- The Cash
(CRR) and the Bank rate retained at 6.00%
Price Index (WPI) Inflation for March 2011 has been raised to 7% from
- The RBI
Current Account Deficit (CAD) for FY2010-11 to be at 3.50% of the GDP
GDP growth for FY2010-11
is being retained at 8.50% with upward bias
in the economy. The credit
growth (Y-o-Y) as at December
end has gone up to 24% as against the RBI’s projection of 20%
whereas, the Money
Supply growth as at December end is at 16.50% against the
RBI’s projection of
withdrawing money for the markets has led to the equity markets losing
7.60% in January. More correction is expected if US shows positive signs
deficit and rising rates make debt market attractive
Quarter Monetary Policy Review
in its third quarter monetary policy review
increased the Repo and Reverse Repo rates by 25 basis points to 6.50%
(One basis point is one hundredth of a percentage). The
hike in the rates was expected as soon as
the WPI inflation for December 2010 rose to 8.43% from 7.48% in
The RBI chose not to hike rates in the mid-quarter policy meet held in
as inflation fell to 7.48% in November from 8.58% in October.
been no change in the other policy rates, the CRR,
(Statutory Liquidity Ratio) SLR and Bank rates have been kept at 6.0%,
6.0%. Chart 1 highlights the rate hikes that RBI has undertaken since
has increased the Repo and Reverse Repo rates seven
times since March 2010. All these rate
hikes have started showing their effect on the industrial production.
industrial production growth, apart from becoming more volatile in the
months, fell to 2.70% in November from 10.80% in October.
November’s numbers are
the lowest in the current financial year.
despite a strong GDP growth of 8.90% in the first half
of FY2010-11, the RBI has not revised its GDP growth projection. The
refusal to increase the GDP growth projections can mean that the rate
might affect the growth of Q3 and Q4 2010-11 harder than anticipated.
non-food credit growth as of December end was at 24%,
higher than RBI’s projection of 20% while the Deposit growth
was at 16.5%
against the RBI’s projection of 17%. The deposit growth in
October first week
was 15.20%; with banks offering higher rates on fixed deposits in
deposit growth grew to 16.50%. The banks will have to pass on the
on deposits to the borrowers; this will increase the borrowing costs
corporate sector which will reduce the profitability of companies.
SENSEX fell by 182 points to close at 18969.45 points on
25 January despite good quarterly results from many companies. The
trading at a 1 year forward PE of 19.04X as of 25 January. Although the
below 20X as seen in the past few months, it is still over valued as
to it long term average of 17X.
SENSEX has performed negatively in January by losing 7.60%
(as at 25 January) despite good quarterly numbers. This is due to FIIs
redeeming their investments. From January 1 to January 24, the FIIs
withdrawn over US$849 Million from the equity market. The outflows may
if US shows positive signs of growth. So, in the short term some
be expected. This will provide the right opportunity for investors to
their investments into equities.
year Government Security yield continues to be in
excess of 8.10%. The rate hikes by RBI and the continuing liquidity
situation will make the debt sector more attractive to domestic and
are increasing their fixed deposit rates due to the
liquidity deficit situation in the system and many mutual fund houses
launching many Fixed Maturity Plans (FMPs) to help investors to get
returns in comparison to fixed deposits.
Recommended Investments in such
who continue to sit on idle cash in your savings bank account can
consider investing into Ultra Short term funds with dividend option, as
tight liquidity situation will yield more returns than the 3.50% on
savings account. Investors can consider investing into Birla Sun-life Ultra short term Fund and BNP Paribas Money Plus Fund.
with 6 to 9 months time horizon can invest in short-term
funds because the liquidity situation is expected to remain tight in
term. Investors can consider investing into Reliance Short Term Fund and Templeton India Short Term Fund.
having a 3 to 24 months time horizon can invest in FMPs as it
is a good time to lock-in yield at the current high levels. To invest
in FMPs click