RBIincreasespolicyratesby25bp: 111 Moreratehikesonthecards

IndiaEquityResearchIIndianEconomy

March22,2010

EconomyUpdate
JayPrakashSinha,CFA jayprakash.sinha@quantcapital.co.in +912240880379 BhupeshBameta bhupesh.bameta@quantcapital.co.in +912240880387 Inflation:Majorupturn,abigcauseofconcern
12.0 Inflation (%)

TheRBIhasincreasedtherepoandreversereporatesby25bpeach,withimmediate effect. The central banks move is much along expectedlines (please refer Inflation close to doubledigits: Monetary tightening on the cards on March 15, 2010). The reverse repo rate now is at 3.5% and the repo rate is at 5%. We expect more rate increasesintheupcomingmonths.Thenextroundismostlikelyinthenextmonetary policyreviewonApril20.Weareoftheopinionthatinthecurrentyeartherewillbe atleasta100bpincreaseinthepolicyrates. TheRBIsdecisiontohikethepolicyratesisguidedbythefollowing: While economic growth has been as per the central banks expectations, inflationhascrosseditsprojectionsof8.5%byMarchend. Instrumentsofthemonetarypolicyareallcurrentlyatlevelsthataremore consistentwithacrisissituationthanwithafastrecoveringeconomy. Lowpolicyratescancomplicatetheinflationoutlookandimpairinflationary expectations. Sincethemonetarypolicyactswithalag,itisbettertorespondinatimely manner, even if it is outside the scheduled policy reviews, than take stronger measures at a later stage when inflationary expectations have accentuated.

10.0 8.0 6.0 4.0 2.0 0.0

Nov09

Dec09

Jun09

Apr09

Oct09

Jul09

Feb09

Sep09

Mar09

2.0

May09

Aug09

Feb10

Jan10

Source:CSO,CEIC

Inourview,thepolicyrateswerenotinsyncwithclosetodoubledigitinflationand recordgrowthinIIPnumbers,andtheRBIwasexpectedtobringitbacktothepre crisis levels. Thus, we see this 25bp increase as positive for the economy as it indicatesthattheRBIismaintainingafinebalancebetweeninflationandgrowth,and itistakingagradualapproachtobringthepolicyratesbacktotheprecrisislevels.A gradualapproachtowardarateincreaseispositivenewsforthemarketbecauseitis lessdisruptive,webelieve. Givenabundantliquidityinthemarketandalowcreditofftake,thereislittlechance ofanimmediaterateincreasebybanks.However,giventheindicationthattheRBI planstoannouncemorerateincreases,theeconomicagentswillpreparethemselves forahigherinterestrateregime,andwearelikelytoseeagradualriseintheinterest rates,soonerthanlater.
Exhibit1: Benchmarkrates
Reporate 10 9 8 7 6 5 4 3 2 1 0
Jan05 Mar05 May05 Jul05 Sep05 Nov05 Jan06 Mar06 May06 Jul06 Sep06 Nov06 Jan07 Mar07 May07 Jul07 Sep07 Nov07 Jan08 Mar08 May08 Jul08 Sep08 Nov08 Jan09 Mar09 May09 Jul09 Sep09 Nov09 Jan10 Mar10

IIP:Remarkablegrowth
20.0 16.0 12.0 8.0 4.0 0.0 IIP (%yy)

Dec08

Nov08

Mar09

Nov09

Dec09

Jun09

Apr09

Feb09

Sep09

Oct09

Jul09

Jan09

May09

Aug09

Jan10

Source:CSO,CEIC

Creditofftake
Bankcreditgrowth 35 30 25 20 15 (%yy)

Reverserepo

CRR

10 5

(%)

Jul08

Jul09

Jan08

Jan09

Oct08

Apr08

Apr09

Oct09

Jan10

Source:RBI,CEIC

Source:RBI,CEIC

RBIincreasespolicyratesby25bp

Ratingsandotherdefinitions
Stockratingsystem
BUY.Weexpectthestocktodeliver>15%absolutereturns. ACCUMULATE.Weexpectthestocktodeliver615%absolutereturns. REDUCE.Weexpectthestocktodeliver+5%to5%absolutereturns. SELL.Weexpectthestocktodelivernegativeabsolutereturnsof>5%. NotRated(NR).Wehavenoinvestmentopiniononthestock.

Sectorratingsystem
Overweight.WeexpectthesectortorelativelyoutperformtheSensex. Underweight.WeexpectthesectortorelativelyunderperformtheSensex. Neutral.WeexpectthesectortorelativelyperforminlinewiththeSensex.

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March22,2010

RBIincreasespolicyratesby25bp

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March22,2010 3