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RBI policy July_2013

RBI policy July_2013



RBI's First Quarter Review of Monetary Policy 2013. Source HSBC Asset Management

RBI's First Quarter Review of Monetary Policy 2013. Source HSBC Asset Management



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    RBI policy July_2013 RBI policy July_2013 Document Transcript

    • RBI's First Quarter Review of Monetary Policy July 2013 Overall Assessment and Outlook Global economic activity continues to remain subdued with elevated downside risk. UK is gathering momentum in economic growth, whereas Eurozone is still facing challenges. Emerging countries like Brazil, Russia and South Africa has lost momentum. Non fuel commodity prices have been easing, though inflation has picked up in emerging markets. Domestic economy has remained subdued with the Index of Industrial Production (IIP) at 0.1% in April - May 2013. Manufacturing Purchasing Managers Index (PMI) has shown some improvement, however the expansion seems to be anaemic. Headline inflation, as measured by Wholesale Price Index (WPI), has edged up slightly to 4.9% in June 2013 on back of higher food inflation. Non-food manufacturing products inflation fell below 2% in June 2013. Credit conditions are expected to remain unchanged in Q2 FY2013-14, but some sectors like construction, infrastructure and commercial real estate may face some tightening. Current account deficit (CAD) moderated to 3.6% in Q4 of 2012-13 down from 6.5% in Q3 of 2012-13. This is however, much higher than sustainable level of 2.5%. In the last quarter, comments from US Federal Reserve regarding tapering of quantitative easing (QE) in the US, triggered outflows in portfolio investments. Several measures in forex, liquidity and gold imports segment were instituted to contain the ensuring exchange market volatility and to reverse unidirectional expectations. Domestic outlook on agricultural growth is positive, whereas industrial and services outlook is sluggish. Government’s policy initiatives may help improve the industrial environment. The RBI expects FY 2013-14 growth to be 5.5%. Inflation may ease given the non-oil commodity prices and lower and stronger than expected monsoon. Major risk to macroeconomic outlook is from external sectors as it is debatable if the market has factored in full impact of prospective tapering of QE, large CAD and deterioration in external vulnerability indicators. The investment climate remains weak and may result in subdued growth. It is hence, critical to ease supply constraints in the economy. The RBI wants to follow a stance of continuous vigil and preparedness to pro-actively respond to risks to the economy from external factors, while managing increased downside risk to growth and inflation expectations. Moderating wholesale inflation, softening food inflation, decelerating growth might have provided a reasonable case for continuing easing stance. However, due to external factors, checks on undue volatility in currency has become a priority for the RBI. The RBI indicated that liquidity measures will be rolled back in calibrated manner once the stability is restored in foreign exchange market. Key Highlights  Repo rate (rate at which RBI lends to banks), kept unchanged at 7.25%  Cash reserve ratio left unchanged (at 4.00%)
    • Going Forward The RBI has maintained that foreign exchange management is its top priority at the moment. The RBI has mentioned that it was a fit case for easier rates, which had to be forfeited due to the need to address external sector concerns. This underlines the dilemma of the Central Bank. On the announcement of calibrated withdrawal of liquidity measures, the currency has shown depreciation pressure. This might impose constraints on monetary policy, going forward. The key to withdrawal of liquidity measures and sustained easy monetary stance lies in government policy actions to support narrowing of CAD and removal of supply constraints. Issue of foreign exchange bonds may also serve as medium term solution. We have reduced duration in most of our funds, and maintain a combination of G- Secs and corporate bonds exposure. Short end of the yield curve remains inverted and thereby creates an opportunity to invest in shorter end of the curve. The pressure on the duration segment may marginally ease due to RBI’s policy statement stating openly the dilemma that the Central Bank faces on addressing the currency concerns vis-à-vis supporting growth. We may look to build some duration on triggers of foreign exchange bond issuance and removal of supply constraints. Disclaimer: Expressions of opinion are those of HSBC only and are subject to change without notice. It does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies that may have been discussed or recommended in this report and should understand that the views regarding future prospects may or may not be realised. Neither this document nor the units of HSBC Mutual Fund have been registered in any jurisdiction. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.  sms INVEST to 56767  www.assetmanagement.hsbc.com/in HSBC Asset Management (India) Private Limited, 16, V.N. Road, Fort, Mumbai-400001 Email: hsbcmf@hsbc.co.in