Mid – Quarter Monetary Policy Review                      www.capitalheight.com
info@capitalheight.com                         Phone- (0731)4295950CONTENTS    Introduction    Global economy    Domestic ...
info@capitalheight.com                                                                           Phone- (0731)4295950Intro...
info@capitalheight.com                                                                            Phone- (0731)4295950Refl...
info@capitalheight.com                                                                            Phone- (0731)4295950Othe...
info@capitalheight.com                                                                          Phone- (0731)4295950Fiscal...
info@capitalheight.com                                                                           Phone- (0731)4295950Conse...
info@capitalheight.com                                                                                                    ...
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RBI MONETARY POLICY REVIEW Special Report By www.capitalheight.com


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RBI MONETARY POLICY REVIEW Special Report By www.capitalheight.com

  1. 1. Mid – Quarter Monetary Policy Review www.capitalheight.com
  2. 2. info@capitalheight.com Phone- (0731)4295950CONTENTS Introduction Global economy Domestic economy Monetary measures Outlook Guidance www.capitalheight.com
  3. 3. info@capitalheight.com Phone- (0731)4295950IntroductionSince the Reserve Bank’s Second Quarter Review (SQR) of October 25, 2011, theglobal economic outlook has worsened significantly. The recent European Union (EU)summit agreement did not assuage negative market sentiments, thereby increasing thelikelihood of persistent financial turbulence as well as a recession in Europe. Bothfactors pose threats to emerging market economies (EMEs), including India.Significantly, despite these developments, crude oil prices remain elevated.On the domestic front, growth is clearly decelerating. This reflects the combined impactof several factors: the uncertain global environment, the cumulative impact of pastmonetary policy tightening and domestic policy uncertainties.Both inflation and inflation expectations are currently above the comfort level of theReserve Bank. However, reassuringly, inflationary pressures are expected to abate inthe coming months despite high crude oil prices and rupee depreciation. The growthdeceleration is contributing to a decline in inflation momentum, which is also beinghelped by softening food inflationGlobal EconomyThe global economic situation continues to be fragile with no credible solution as yet tothe immediate euro area sovereign debt problem. At the EU summit on December 8-9,the European leaders agreed on a new fiscal compact, involving stronger coordinationof economic policies to strengthen fiscal discipline. While the agreement is necessaryfor medium and long-term sustainability of the euro area, its ability to resolve short-termfunding pressures was questioned by markets. Q3 euro area growth, at 0.8 per cent,was anemic and 2012 growth is now expected to be weaker than earlier projected. www.capitalheight.com
  4. 4. info@capitalheight.com Phone- (0731)4295950Reflecting these projections, the European Central Bank (ECB) cut its policy rate twicein the last two months, and also implemented some non-standard measures. Bycontrast, growth in the US in Q3 of 2011 was better than in Q2, although stillsubstantially below trend.Growth in EMEs is also moderating on account of sluggish growth in advancedeconomies and the impact of monetary tightening to contain inflation. In view of theslowing down of their economies, Brazil, Indonesia, Israel and Thailand cut their policyrates, while China cut its reserve requirements. EME currencies have also come undervarying degrees of downward pressure as a result of global risk aversion and financialstress emanating from the euro area.Domestic EconomyGDP growth moderated to 6.9 per cent in Q2 of 2011-12 from 7.7 per cent in Q1 and8.8 per cent in the corresponding quarter a year ago. The deceleration in economicactivity in Q2 was mainly on account of a sharp moderation in industrial growth. On theexpenditure side, investment showed a significant slowdown. Overall, during the firsthalf (April-September) of 2011-12, GDP growth slowed down to 7.3 per cent from 8.6per cent last year.Industrial performance has further deteriorated as reflected in the decline of the index ofindustrial production (IIP) by 5.1 per cent, y-o-y, in October 2011. This was mainly dueto contraction in manufacturing and mining activities.The contraction was particularly sharp in capital goods with a y-o-y decline of 25.5 percent, reinforcing the investment decline story emerging from the GDP numbers. www.capitalheight.com
  5. 5. info@capitalheight.com Phone- (0731)4295950Other indicators also suggest a similar tendency, though by no means as dramatic asthe IIP. The HSBC purchasing managers index (PMI) for manufacturing suggestedfurther moderation in growth in November 2011. However, PMI-services indexrecovered in November from contractionary levels in the preceding two months.Corporate margins in Q2 of 2011-12 moderated significantly as compared with theirlevels in Q1. The decline in margins was largely on account of higher input and interestcosts. Pricing power is evidently declining.On the food front, the progress of sowing under major rabi crops so far has beensatisfactory, with area sown under food grains and pulses so far being broadlycomparable with that of last year.InflationOn a y-o-y basis, headline WPI inflation moderated to 9.1 per cent in November from9.7 per cent in October, driven largely by decline in primary food articles inflation. Fuelgroup inflation went up marginally. Notably, non-food manufactured products inflationremains elevated, actually increasing to 7.9 per cent in November from 7.6 per cent inOctober, reflecting rising input costs. The new combined (rural and urban) consumerprice index (base: 2010=100) rose further to 114.2 in October from 113.1 in September.Inflation in terms of other consumer price indices was in the range of 9.4 to 9.7 per centin October 2011.Reassuringly, headline momentum indicators, such as the seasonally adjusted month-on-month and 3-month moving average rolling quarterly inflation rate, show continuingsigns of moderation. www.capitalheight.com
  6. 6. info@capitalheight.com Phone- (0731)4295950Fiscal SituationThe central government’s key deficit indicators worsened during 2011-12 (April-October), primarily on account of a decline in revenue receipts and increase inexpenditure, particularly subsidies. The fiscal deficit at 74.4 per cent of the budgetedestimate in the first seven months of 2011-12 was significantly higher than 42.6 per centin the corresponding period last year (about 61.2 per cent if adjusted for more thanbudgeted spectrum proceeds received last year).Money, Credit and Liquidity ConditionsThe y-o-y money supply (M3) growth moderated from 17.2 per cent at the beginning ofthe financial year to 16.3 per cent on December 2, 2011, although still higher than theprojected trajectory of 15.5 per cent for the year. Y-o-y non-food credit growth at 17.5per cent on December 02, 2011, however, was below the indicative projection of 18 percent. Consistent with the stance of monetary policy, liquidity conditions have remainedin deficit during this fiscal year. The Reserve Bank conducted open market operations(OMOs) on three occasions in November-December 2011 for an amount aggregatingabout 24,000 crore to ease liquidity conditions. However, further OMOs will beconducted as and when seen to be appropriate.Monetary MeasuresOn the basis of the current macroeconomic assessment, it has been decided to: Keep the cash reserve ratio (CRR) unchanged at 6 per cent; and Keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.5 per cent. www.capitalheight.com
  7. 7. info@capitalheight.com Phone- (0731)4295950Consequently, the reverse repo rate under the LAF will remain unchanged at 7.5 percent and the marginal standing facility (MSF) rate at 9.5 per centOutlookGlobal growth for 2011 and 2012 is now expected to be lower than earlier anticipated.Increased strains in financial markets on the back of growing concerns over euro areasovereign debt, limited monetary and fiscal policy, high unemployment rates, weakhousing markets and elevated oil prices are all contributory factors. These factors havealso contributed to moderating growth in the EMEs. As a consequence of all-roundslower growth, inflation has also started declining, both in advanced countries andEMEs. Industrial activity is moderating, driven by deceleration in investment, which is amatter of serious concern. Consequently, the headline inflation projection at 7 per centfor March 2012, as set out in the FQR, was retained in the SQR. With moderation infood inflation in November 2011 and expected moderation in aggregate demand, theinflation projection for March 2012 is retained at 7%. The Reserve Bank will make aformal numerical assessment of its growth and inflation projections for 2011-12 in thethird quarter review of January 2012.GuidanceWhile inflation remains on its projected trajectory, downside risks to growth have clearlyincreased. The guidance given in the SQR was that, based on the projected inflationtrajectory, further rate hikes might not be warranted. In view of the moderating growthmomentum and higher downside risks to growth, this guidance is being reiterated. Fromthis point on, monetary policy actions are likely to reverse the cycle, responding to therisks to growth. However, it must be emphasized that inflation risks remain high and www.capitalheight.com
  8. 8. info@capitalheight.com Phone- (0731)4295950inflation could quickly recur as a result of both supply and demand forces. Also, therupee remains under stress. The timing and magnitude of further actions will depend ona continuing assessment of how these factors shape up in the months aheadDisclaimerThe information and views in this report, our website & all the service we provide are believed to be reliable, but we do notaccept any responsibility (or liability) for errors of fact or opinion. Users have the right to choose the product/s that suitsthem the most.Sincere efforts have been made to present the right investment perspective. The information contained herein is based onanalysis and up on sources that we consider reliable.This material is for personal information and based upon it & takes no responsibilityThe information given herein should be treated as only factor, while making investment decision. The report does notprovide individually tailor-made investment advice. Capitalheight recommends that investors independently evaluateparticular investments and strategies, and encourages investors to seek the advice of a financial adviser. Capitalheight shallnot be responsible for any transaction conducted based on the information given in this report, which is in violation of rulesand regulations of NSE and BSE.The share price projections shown are not necessarily indicative of future price performance. The information herein,together with all estimates and forecasts, can change without notice. Analyst or any person related to Capitalheight might beholding positions in the stocks recommended. It is understood that anyone who is browsing through the site has done so athis free will and does not read any views expressed as a recommendation for which either the site or its owners oranyone can be held responsible for . Any surfing and reading of the information is the acceptance of this disclaimer.All Rights Reserved.Investment in Commodity and equity market has its own risks.We, however, do not vouch for the accuracy or the completeness thereof. we are not responsible for any loss incurredwhatsoever for any financial profits or loss which may arise from the recommendations above. Capital height does notpurport to be an invitation or an offer to buy or sell any financial instrument. Our Clients (Paid Or Unpaid), Any third party oranyone else have no rights to forward or share our calls or SMS or Report or Any Information Provided by us to/with anyonewhich is received directly or indirectly by them. If found so then Serious Legal Actions can be taken www.capitalheight.com