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
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
Demand Outlook
Order Books (current quarter)Order Books (next quarter) [Right]
-20
-10
0
10
20
30
40
50
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
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
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