RBI Mid Quarter Monetary Policy Review - 16-Dec 2010

8/7/2019 RBI Mid Quarter Monetary Policy Review - 16-Dec 2010

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RBIs Mid-Quarter Monetary Policy Review

16thDecember 2010

CORPORATE ECONOMICS CELL


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Policy synopsis

Movement in Key Policy Rates (%)

Eff since Reverse Repo Repo CRR

5-Jan-09 4.00 5.50 5.5017-Jan-09 4.00 5.50 5.004-Mar-09 3.50 5.00 5.0021-Apr-09 3.25 4.75 5.00

28-Jul-09 3.25 4.75 5.00

27-Oct -09 3.25 4.75 5.00

29-Jan-10 3.25 4.75 5.75

19-Mar-10 3.50 5.00 5.75

20-Apr-10 3.75 5.25 6.00

2-Jul-10 4.00 5.50 6.00

27-Jul-10 4.50 5.75 6.0016-Sep-10 5.00 6.00 6.00

2-Nov-10 5.25 6.25 6.00

16-Dec-10 5.25 6.25 6.00

Reserve Bank of India (RBI) has kept the

repo, reverse repo and cash reserve ratio constant.Statutory Liquidity Ratio (SLR) reduced from 25% ofbanks net demand and time liabilities to 24%. (freeing

up roughly Rs 510 bn)

Will conduct open market operations which will

inject Rs 480 bn liquidity in the next one month.

RBI has added an upward risk to its projection of5.5% (y/y) inflation (WPI) by Mar11. The growth

projection of 8.5% for FY11 remains unchanged.

Opinion: The RBI has clearly indicated that the current

liquidity tightness is beyond its comfort level. The planned

increase in liquidity from the above measures is around

Rs 1000 bn which is close to the current average liquidity deficitin the market. Note that the reduction in SLR is a permanent

measure; which possibly underlinesRBIs acknowledgement of

the current liquidity deficit being a structural rather than

episodic problem. These measures will definitely ease pressure on

interest rates, especially the short term rates. RBIs concern over

inflationary pressure indicates that a subsequent rate hikes byend-FY11 may be possible.


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Aspects of RBIs decision

INFLATION

GROWTHLIQUIDITY

(Click to choose or simply scroll down)


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LIQUIDITY

BACK


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Tight liquidity conditions

-1500

-1000

-500

0

500

1000

1500

Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10

Net LAF amount (Rs bn)

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

Apr-10 Jun-10 Aug-10 Oct-10 Dec-10

Gsec Yield (%)

10 yr gsec 1 yr gsec

Liquidity has been tight since Jun10. Average

injection of liquidity by the RBI in the pastmonth has been around Rs 1000 bn. The 1 year

Gsec yield has increased by over 200 bps from

Apr-Dec10 in response. The RBI has indicated that it intends to stabilise

interest rates in the overnight inter-bank market closer to

the operative policy rate. As the graph on the left

indicates; since Sep10, the short term call rate has

unconventionally out of the window between

repo and reverse repo rates.

1.5

2.5

3.5

4.5

5.5

6.5

7.5

8.5

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Call Rate

Repo

Reverse Repo

Call vs Repo vs Reverse Repo rate

BACK


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Structural liquidity deficit?

10

12

14

16

18

20

22

24

26

Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Non-food credit offtake

Deposit

Credit vs Deposit growth rates (% y/y)

The RBI maintained that the tightness of liquidity is owing to persistence of large government cash

balances which have averaged Rs 840 bn since the Q2 monetary policy review (2nd

Nov 2010). This isprimarily owing to the government already receiving 63% of budgeted revenue receipt in Apr-Oct

2010 as against 47% achieved in the corresponding period of the previous year..

However the Reserve Bank is also worried about structural factors influencing liquidity. As the

graphs above show; deposits growth is not able to match credit growth. Additionally currency with the

public has registered sharp rise. The above-trend currency expansion and relatively sluggish deposit

growth rate will contribute to persistent liquidity crunch in the system.

12

14

16

18

20

22

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10

Currency with public (% y/y)

BACK


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GROWTH

BACK


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Strong growth performance

In Apr-Oct10, Index of Industrial Production (IIP) has grown by an impressive 10.3% (y/y). The

industrial production in Oct grew at a surprisingly high 10.8%. However the 6-month moving average

is showing decline (given that the original series is relatively volatile) The RBI opines that various indicators of industrial activity including the PurchasingManagers

Index (PMI) suggest strong underlying momentum. Lead indicators of services sector activity have

continued to increase at robust pace.

GDP grew by a healthy 8.9% in Q3 FY10, same as the previous quarter. While investment levels

have moderated from 19% in Q2 to 11.5% in Q3; private consumption continued to rise. The RBI

maintains its optimism for growth, and forecasts 8.5% GDP growth by FY11.

-1

4

9

14

19

24

Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10

IIP (% y/y) 6-month MA

Industrial

Production

-6

-1

4

9

14

19

5

6

7

8

9

10

Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10

GDP (% y/y) [Left] Private consumption (% y/y)

Investment (% y/y)

Growth

Dynamics

BACK


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RBIs industry outlook survey:

Jul-Sep 2010

-20

-10

0

10

20

30

40

50

60

Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10

Overall Business Situation

Overall Business Situation (current quarter)Overall Business Situation (next quarter)

0

510

15

20

25

30

35

40

45

50

-20

-10

0

10

20

30

40


Demand Outlook

Order Books (current quarter)Order Books (next quarter) [Right]

-20

-10

0

10

20

30

40

50


Financial Situation outlook

Financial Situation (current quarter)Financial Situation (next quarter)

Overall business sentiment remained

strong for the next quarter (Q4 FY10)among the manufacturing companies

participating in RBIs latest industrial outlooksurvey. Demand outlook, quantified by order

books also remains robust.

While RBIs hawkish monetary policy had

dampened the Financial Situation outlook

for companies; there is an uptick recorded

for Q4 (left)BACK


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INFLATION

BACK


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Inflationary pressures exist

-2

0

2

4

6

8

10

12

Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10

WPI (% y/y)

-2

0

2

4

6

8

10

-15

-10

-5

0

5

10

15

20

25

Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10

Break-up of WPIFuel Primary Manufactured (right)

Inflation declined to 7.5% in Nov10 compared to 8.6% in the previous month. This has been the first

time in the past ten months that WPI has dipped below 8%; primarily owing to base effect. While Food

price inflation has moderated from an average of 15.7% in Q1 FY11 to 12.3% in Q2, to 6.1% in Nov10;inflation is still being driven by protein items, suggesting a structural shift in consumption patterns. In

addition, non-food inflation primary inflation is strengthening.

RBIs Industrial Outlook survey in Q3 2010 reveals that most manufacturing companies have reported

hardening of input and selling prices in the current and forthcoming quarters. This will put further

pressure on manufacturing inflation.

RBIs household inflation survey suggests firming of inflationary expectations for the next quarter and

year. The RBI cites increasing domestic demand and high global commodity prices as potential inflationaryrisks. It maintains WPI forecast of 5.5% by Mar11, with the addition of an upward bias.


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Thank You

Published byCorporate Economics Cell. The material contained herein has been obtained from sources believed to be reliable but is not necessarily complete and cannot be guaranteed.

Any opinion expressed is subject to change without notice. All information is for the private use of the person to whom it is provided without any liability whatsoever on the part of

Aditya Birla Management Corporation Private Limitedor any associated company or any employee thereof.

RBI Mid Quarter Monetary Policy Review - 16-Dec 2010

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