Monetary Policy Review | Banking

May 3, 2013

Monetary Policy Review

RBI reduces repo rate by 25bp on expected lines
Policy Measures

Vaibhav Agrawal
022 3935 7800 Ext: 6808 vaibhav.agrawal@angelbroking.com

Bhupali Gursale
022-3935 7800 Ext: 6820 bhupali.gursale@angelbroking.com

The Reserve Bank of India (RBI) in its Monetary Policy Review delivered on expected lines and reduced the Repo Rate by 25bp from 7.50% to 7.25%. Consequently, the Reverse Repo Rate stands adjusted to 6.25% and the Marginal Standing Facility Rate and Bank Rate stand adjusted to 8.25%. The Cash Reserve Ratio remains unchanged at 4.00% of banks NDTL. RBI maintained a cautious stance and indicated that there is a little space for further monetary easing. While it acknowledged lower inflation trajectory going ahead, it expressed caution with respect to the Capital flows and the CAD, and as a result, mentioned only limited headroom for further monetary easing. In line with this, we expect another one or two rate cuts going ahead, while positive surprise in forthcoming inflation readings, may provide further headroom.

Policy addresses accentuated risks to growth

As per the RBI, the two main considerations behind the continuance of the growthsupportive monetary policy were 1) the recent deceleration in economic activity along with the expectations of gradual and modest economic recovery from here on and 2) the recent gradual moderation in WPI inflation (particularly ebbing of core inflation). Real GDP growth has slowed much more than expected (at 4.5% during 3QFY2013, the lowest in 15 quarters). The economic recovery from here on is likely to be gradual and modest and as per the RBI, GDP in FY2014 is likely to grow by 5.7%. RBI projects banking system credit to grow by 15% and deposits by 14% in FY2014.

However, stance remains cautionary

Notwithstanding, the recent correction in the international commodity prices (incl. gold, crude etc.), the RBI expressed caution considering 1) the need to keep differential with the global interest rates high, so as to keep attracting capital flows to finance the precarious current account deficit, 2) the near-term upside risks to inflationary expectations, stemming from supply-side bottlenecks, elevated food inflation and the ongoing correction in administered fuel prices, and 3) the elevated CPI inflation levels.

Exhibit 1: Moderation in inflation as core recedes

(%) 10.0 8.0 6.0 6.0 4.0 2.0 3.4 Core Inflation WPI Inflation

Exhibit 2: CAD at record high level of 6.7% of GDP

(USD bn) 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 (% ) 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

Dec-11

Aug-12

Dec-12

Jan-12

Jun-12

Mar-12

Jan-13

Nov-11

Nov-12

May-12

Mar-13

Oct-11

Apr-12

Feb-12

Oct-12

Sep-11

Sep-12

Feb-13

Jul-12

Current account deficit

Current account deficit/GDP (RHS)

Source: Office of Economic Adviser, Angel Research

Source: RBI, Angel Research

Please refer to important disclosures at the end of this report

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Monetary Policy Review

Exhibit 3: Crude prices have declined recently

130 125 120 115 110 105 100 95 90 85

Exhibit 4: Gold prices too have corrected recently

(USD/Oz) 1900 1800 1700 1600 1500 1400 1300
Aug-12 Dec-12 Apr-13 Nov-12 May-12 May-12 Nov-12 Mar-13 Oct-12 Sep-12 Sep-12 Feb-13 Apr-13 Jul-12 Jun-12 Jul-12 Jan-13 Jan-13

(US $ /barrel)

May-12

Sep-12

Aug-12

Dec-12

Feb-13

Jun-12

Jul-12

Jan-13

Mar-13

Source: Bloomberg, Angel Research

Nov-12

Oct-12

Apr-13

Source: Bloomberg, Angel Research

Exhibit 5: Downtrend in real GDP growth

(%) 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 5.8 3.5 5.7 9.8 8.5 9.0 7.5 11.2 9.7 8.9 9.3 9.2 7.5 6.5 6.0 Real GDP

Exhibit 6: Divergence between WPI and CPI inflation

(%) 12.0 11.0 10.0 10.4 WPI Inflation CPI inflation

5.3 5.5 5.3

9.0

4.5

8.0 7.0 6.0 5.0 6.0

May-12

Sep-12

Dec-12

Aug-12

Mar-12

Feb-13

Jun-12

Jul-12

Apr-12

Jan-13

Source: CSO, Angel Research

Source: Office of Economic Adviser, RBI, Angel Research

Exhibit 7: Easing of key policy rates

(%) 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 4.00 6.25 7.25 Repo rate Reverse Repo rate CRR

Exhibit 8: Credit and deposit growth - trends

(%) 24.0 22.0 20.0 18.0 16.0 14.0 12.0 10.0

Credit growth

Deposit growth

Dec-11

Nov-12

Aug-11

Aug-12

Dec-12

Jun-11

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Apr-12

Jun-12

Oct-11

Feb-12

Oct-12

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Sep-11

May-06

May-07

May-08

Sep-12

Source: RBI, Angel Research

May-13

May-09

May-10

May-11

May-12

Source: RBI, Angel Research

May 3, 2013

Feb-13

Apr-13

Mar-13

Oct-12

Monetary Policy Review

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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May 3, 2013

Monetary Policy Review

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May 3, 2013