RBI Revises Outlook, Growth Downwards And Inflation Upwards

Introduction

The much-eyed Reserve Bank of India (RBI)’s first quarter monetary meet came out today, with RBI retaining the repo rate and the Cash Reserve Ratio (CRR) at 8 and 4.75 per cent respectively which was in line with D-Street’s expectations of the RBI maintaining its status quo. However, the governor’s move of surprising the markets continued as it slashed the Statutory Liquidity Ratio (SLR) by 100 basis points to 23 per cent. We at Dalal Street Investment Journal (DSIJ) had given a quick update as soon as the policy was out in the Mindshare column titled: RBI Keeps Status Quo On Repo And CRR, SLR Down 100 Basis Points.

Further, it was important to note is that RBI has given a gloomy picture for the fiscal FY2012-13 for our economy. It has revised the GDP growth outlook downwards to 6.5 per cent against the earlier estimation of 7.3 per cent. On the other hand the baseline projection for Inflation is revised upwards to 7 per cent from the earlier 6.5 per cent for March 2013. We further have carried out detailed analysis of the outcome of the policy which will further help our Investors.

Some of the key highlights of the policy report are:

o RBI decided to retain the repo rate and reverse repo rate at 8 and 7 per cent respectively.

o Marginal Standing facility (MSF) and Bank rate also stayed at the same level of 9 per cent.

o CRR also has been retained at 4.75 per cent of their Net Demand and Time liabilities (NDTL).

o It slashed the SLR by 100 basis points to 23 per cent of NDTL, which will be effective from the fortnight beginning 11th August 2012.

o The primary focus of monetary policy remains Inflation control in order to secure a sustainable growth over the medium term.

o The report further said that, despite the slowing global economy, the outlook for commodity prices is uncertain.

o Against the uncertain environment, the challenge for monetary policy is to maintain its priority of containing Inflation and lowering Inflation expectations.

o The report further stated concerns on the current monsoon. It said that if rain deficiency persists, agriculture production could be adversely impacted.

o Further, a common sample of 2273 companies (non-government and non financial companies) for June quarter of 2012, showed a positive sales growth, however earning decelerated due to higher expenditure indicating declining pricing power.  

o Deposit growth in mid-July stood at 14.3 per cent while credit growth stood at 17.4 per cent. It also retained the deposit and credit growth projection of 15 and 17 per cent for 2012-13.

o Following the reduction of the repo rate in April, modal base rate of Scheduled Commercial bank (SCBs) declined by 25 basis points to 10.50 per cent during June quarter of 2012.

o Liquidity condition have eased considerably since the April policy, with Liquidity Adjustment Facility (LAF) standing at 0.7 per cent of NDTL in July 2012 against 2.2 per cent of NDTL in March quarter of 2012.  This was due to the RBI conducted open market operations of around Rs 860 billion.

o The 10 year benchmark yield came down as it stood at 8.11 per cent as on July 26, 2012 against 8.63 per cent at the end of March 2012.

o The next mid quarter Review of Monetary Policy of 2012-13 is scheduled on 17th September 2012 while the Second quarter review policy is thereafter scheduled on 30th October 2012.

DSIJ’s View

We believe the RBI has taken the right steps as it retained the repo rate at the same level. We have always guided our investors and readers through our previous article that inflationary risk continued to hiver above the economy. Further we believe that with scarce Monsoon this year would help the food and vegetable price to move northwards. Talks of diesel deregulation coupled with Brent Crude again trying to climb would fuel Inflation higher. The rupee still been above the comfort level is worsening our balance of payments.

However, the move of SLR which was reduced by 100 basis points was surprising. We believe there was no need for the RBI to slash the SLR rate as current liquidity is in very comfortable position. As per its policy reports LAF in July 2012 stands at 0.7 per cent which is well below the RBI’s comfort level of 1 per cent. Further according to media reports, the Indian banks are already sitting with higher SLR of around 27 to 28 per cent. And hence there was indeed no need for the RBI to go in for a cut in SLR rate.

We believe the move by the RBI would actually help the economy to be in a better shape. Our economy at present is hungry for growth, which we believe should be bought by taking some of the reformist action by the government. For the markets one could see more stock specific action as the companies post their June quarter results.