Mid Quarter Monetary Policy Review

7/30/2019 Mid Quarter Monetary Policy Review

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ICRAOnlineLimited

MidQuarterReviewof

MonetaryPolicyMarch15,2012

ICRONRESEARCH

DESK


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MidQuarterReviewofMonetaryPolicyMarch15,2012

ICRAOnlineLimited

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TheCentralBankkeptpolicyreporateunchangedat8.50%.

Consequently,the

reverse

repo

remained

unchanged

at

7.50%

and

marginal

standing

facility

(MSF)rateandthebankrateat9.50%.

TheRBIkepttheCashReserveRatio(CRR)unchangedat4.75%after itwasreducedby75

bpsonMarch9toaddressthepersistentstructuraldeficitbeyondthecomfortlevel.

TheperformanceofGDP in4QFY12 isexpectedtobebetterthanthe lastquarterfigureof

6.1%.

Inflationalthoughmoderatedlatelybutupsideriskmightevolveduetohigherglobalcrude

oilprices,coupledwithhigherfiscaldeficit.

Interestrateshavepickedandfutureactionswouldbetowardsloweringofrates.

Overview:

Thecurrent

policy

review

was

supposed

to

be

anon

event

after

the

inflation

data.

The

tone

of the statement was rather cautious as

higher freight rates, announcedbyRailways,

and global commoditypriceswouldpushup

inflation in coming months. Though people

here are arguing whether 6.50%7.00% is a

good rate of growth or not, however, it is

indeed a very handsome return for foreign

investors. The liquidity generated through

long term refinancing operations (LTRO) is

slated to flow to emerging economies like

India.The

banking

system

is

facing

structural

liquiditydeficit and to improve that, theRBI

hasalreadyslashedcashreserveratio(CRR)bY125basispoints.

Rationale:

To combatwith the rising inflation rate, the

RBIhasraised thekey interestrates thirteen

times consecutively, which in turn, has

adversely impacted the growth trajectory of

theeconomy.TheGDP for the thirdquarter

plungedto

6.1%,

the

lowest

in

last

two

years.

Ontheotherhand,despitecoolingeffect,the

inflationmoved up to 6.95% in February as

against 6.55% reported amonth ago but it

still remained below the central bank's end

Marchprojectionof7%.Foodarticleindex,afterremainingatsubduedrateof0.79%and()0.52%

forlastcoupleofmonths,suddenlysurgedto6.07%inthemonthofFebruary.RBIsdecisiontokeep

the rates unchanged after October review has supported the IIP number and it has improved

gradually.WhileinOctober,IIPmovedtonegativeterrainat4.74%,itrecoveredandstoodat6.8%

in January, thestrongest in last sevenmonths.Thuswith thedecisionofkeeping thepolicy rates

unchangedand

reducing

the

CRR,

RBI

has

made

its

intention

clear

of

bringing

the

Asias

third

largest

economybackonthegrowthpathandgivingaboosttothemacroeconomy.

RBIkeptkeypolicyratesunchanged,nopositivesurpriseforthemarkets


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Themainreasonsbehindthismove

The slippage in the fiscal deficit is adding to inflationary pressures, credible fiscal

consolidationwould be an important factor in shaping the inflation outlook. The Union

Budget

would

be

important

as

fiscal

deficit

numbers

and

gross

market

borrowings

would

be

keenlywatchedbyRBIandmarkets.

Afterraisingthekeypolicyratesinpastquarters,liquiditycrunchwasseenintheeconomy,

whichadverselyimpactedthesupplyside.KeepingthepolicyratesunchangedinDecember

and slashing the CRR in January, RBI tried to bring the economy out of poor liquidity

situation.Moreover,withnobondauction scheduled till the firstweekofAprilandhuge

redemptionslinedup,bondyieldsandliquiditysituationarelikelytoimproveinshortterm.

MarketwasexpectingareversepolicymeasurebyRBIinthiscurrentfiscalwhich,however,

wasnotpossibleafterseeingtheglobalmacroeconomicsituation.Inflationstillremaineda

causeofconcernforRBIduetorisingglobalcrudeprices.

Hugefiscal

deficit

of

the

government

became

amatter

of

concern

for

RBI.

With

higher

oil

and fertilizer subsidy, it has breached the targeted level of 4.6% ofGDP in the first ten

monthsof the year and it isexpected towiden further in thenext twomonths.Thus to

finance thedeficit,RBIprintsnotes to lend to the government,which in turn, raises the

moneysupplyintheeconomy.Withhighermoneysupply,inflationwouldalsomovesnorth

wardandwouldaffect theeconomyadversely.Thus theeconomy,asawhole, is trapped

under the vicious cycle of liquidity crunch.With the cut in CRR, RBI has tried to seek a

primaryandpermanentinstrumentofcreditcontrol.

Intheglobalfront,recovery intheUSeconomycoupledwith liquidity injectionbyECBhas

mitigated some pressure on the financial market. However, rise of commodity prices

following conflictbetween Iranand theUSmight create someuncomfortable situation in

theglobalframework.

MarketReactions:

ThepolicystatementbyRBIalwaysimpactsboththeequityanddebtmarkets.Asthetableabove

shows,themarketsentimentschangeswiththepolicystatement.Inthecurrentquarter,themarket

wasexpectinga25bpsreductioninthekeypolicyrates,henceboththebroadermarketandBankex


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wentup.However,assoonasthestatementshowednochangesinthekeyinterestrates,profit

bookingssentmarketbackinred.

Thebarometer index,BSESensex,wasdown227.03pointsor1.27%,upcloseto70points

from

the

day's

low

and

off

close

to

220

points

from

the

day's

high

after

the

RBI

kept

key

interest ratesunchanged in itspolicy review,putting to resthopes that the centralbank

couldsurprisemarketswithmonetaryeasing.

AllthesectoralindicesatBSEwereinredexceptIT.Ratesensitivesectorsreactednegatively

due to profit booking. ConsumerDurables (3.66%), Realty (2.66%) and Bankex (2.60%)

weretheworstperformingsectors.

The rupee was at 50.22/23 per dollar, weaker thanWednesday's close of 49.91/92, as

demandofdollarfromgoldimportersweighed.

Theyieldonthe10yearbenchmark8.79%2021bondroseto8.36%from8.29%afterthe

RBIleftkeypolicyratesunchanged.

Outlook:

The Central Bank did not give a positive surprise to the market and kept the key policy ratesunchangedas the inflation risks have not completely disappeared.TheUnionBudgetwould beacrucialeventandalleyeswouldbeonfiscaldeficitandgrossmarketborrowingsnumber.Inthenextmonetarypolicy,itisexpectedthatRBIwillreducethekeyinterestratesby25bpsandkeeptheCRRratesunchangedascutof125bpshasalreadyinjectedliquidityworthRs.70,000crore.

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and

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Online

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by

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from

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use

of

this

document

or

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Mid Quarter Monetary Policy Review