Mid-Quarter Monetary Policy Review | Banking

March 15, 2012

Mid-Quarter Monetary Policy Review

Status quo on repo rate and CRR
Key highlights
Keeps SLR and CRR unchanged at 24.0% and 4.75%, respectively Holds on to key policy rates (Repo: 8.5%, Reverse Repo: 7.5% and MSF: 9.5%) Monetary policy maintains status quo in-line with consensus: The Reserve Bank of India (RBI) in its mid-quarterly monetary policy review kept both CRR and repo rate unchanged, in-line with streets expectations. The RBI, in its third quarter review of the monetary policy (January 24, 2012), had clearly stated that fiscal consolidation measures in the forthcoming budget (scheduled on March 16, 2012) would be a critical factor in the commencement of the monetary easing cycle. Accordingly, it was widely expected that the RBI would hold on to key policy rates in todays monetary policy and wait for credible signs of fiscal consolidations before initiating rate cuts. Also, while February inflation readings were in-line with the RBIs year-end projections, the RBI preferred to adopt a wait-and-watch approach, pointing out that the current readings do not reflect higher fuel, power and fertilizer prices. The RBI has injected nearly `2lakh cr in the past six months (~`1.2lakh cr via OMOs and `0.8lakh cr via cumulative 125bp CRR cut). Hence, in the backdrop of the 75bp CRR cut already done just a few days back, as expected, the RBI kept the CRR unchanged in todays monetary policy. Inflation environment benign for monetary easing commencement: Food inflation for February 2012 climbed back to 6.1% yoy (negative 0.5% yoy for January 2012). However, the sharp yoy jump in food inflation can be attributed to the low base effect (decline of 5.8% mom in food inflation in February 2011). Also, for February 2012, annualized mom food inflation levels stood at 5.6%, lower than the six-month annualized figure of 7.1%. Manufacturing inflation eased further to 5.7% yoy (lowest levels in over a year) from 6.5% yoy levels in January 2012. Annualized mom growth in the manufacturing index stood at 4.2% and even the six-month annualized figure was at low 4.6% levels. More importantly, core inflation, which the RBI tracks closely for its monetary policy decisions, eased further to 5.5% levels. The marked decline in manufacturing inflation levels over the past three months (~240bp) has been visible post the dip in primary inflation, as a large part of pass-through of primary inflation is, in our view, already done with. Going ahead, sustained lower food inflation levels are likely to lead to lower wage inflation, which in turn are likely to translate into further easing of manufacturing inflation levels.

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

Varun Varma
022 3935 7800 Ext: 6847 varun.varma@angelbroking.com

Hence, in our view, the overall inflation environment, apart from fuel-related concerns, seem to be benign for monetary easing commencement; and we expect the RBI to begin with more decisive signaling through repo rate cuts from April 2012. Resurgence in inflation levels (we assign a low probability to the same) and a more populist budget than expected are possible impediments that could push back the initiation of rate cuts.

Please refer to important disclosures at the end of this report

Third-Quarter Monetary Policy Review

Exhibit 1: Credit and deposit growth trends

(%) 35.0 28.0 21.0 14.0 7.0 Credit growth Deposit growth

Dec-09

Aug-06

Mar-06

Nov-07

May-10

Mar-11

Aug-11 Feb-12

Apr-08

Jul-09

Oct-05

Sep-08

Feb-09

Oct-10

Jun-07

Source: RBI, Angel Research

Exhibit 2: Liquidity pressures prompted the RBI for a cumulative 125bp CRR cut since January 24, 2012
(` bn)

1,000 500 (500) (1,000) (1,500) (2,000) (2,500)

Jan-07

Sep-11

Oct-11

May-11

Nov-11

Dec-11

Jun-11

Apr-11

Source: RBI, Angel Research

Exhibit 3: Inflation levels on a moderating trend

Primary Articles 20.0% 16.0% 12.0% 8.0% 4.0% 0.0% Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Fuel & Power Manufactured Products

Source: RBI, Angel Research

March 15, 2012

Mar-11

Aug-11

Jan-12

Jul-11

Jan-12

Third-Quarter Monetary Policy Review

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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March 15, 2012

Third-Quarter Monetary Policy Review

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Fundamental: Sarabjit Kour Nangra Vaibhav Agrawal Bhavesh Chauhan Sharan Lillaney V Srinivasan Yaresh Kothari Nitin Arora Ankita Somani Varun Varma Saurabh Taparia Technicals: Shardul Kulkarni Sameet Chavan Sacchitanand Uttekar Derivatives: Siddarth Bhamre Institutional Sales Team: Mayuresh Joshi Hiten Sampat Meenakshi Chavan Gaurang Tisani Akshay Shah Production Team: Simran Kaur Dilip Patel Research Editor Production simran.kaur@angelbroking.com dilipm.patel@angelbroking.com VP - Institutional Sales Sr. A.V.P- Institution sales Dealer Dealer Sr. Executive mayuresh.joshi@angelbroking.com hiten.sampat@angelbroking.com meenakshis.chavan@angelbroking.com gaurangp.tisani@angelbroking.com akshayr.shah@angelbroking.com Head - Derivatives siddarth.bhamre@angelbroking.com Sr. Technical Analyst Technical Analyst Technical Analyst shardul.kulkarni@angelbroking.com sameet.chavan@angelbroking.com sacchitanand.uttekar@angelbroking.com VP-Research, Pharmaceutical VP-Research, Banking Metals, Mining Mid-cap Research Associate (Cement, Power) Research Associate (Automobile) Research Associate (Infra, Real Estate) Research Associate (IT, Telecom) Research Associate (Banking) Research Associate (Cement, Power) sarabjit@angelbroking.com vaibhav.agrawal@angelbroking.com bhaveshu.chauhan@angelbroking.com sharanb.lillaney@angelbroking.com v.srinivasan@angelbroking.com yareshb.kothari@angelbroking.com nitin.arora@angelbroking.com ankita.somani@angelbroking.com varun.varma@angelbroking.com Sourabh.taparia@angelbroking.com

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March 15, 2012