1. Market Insight
JANUARY 2013
RBI’S THIRD QUARTER REVIEW OF ANNUAL POLICY (FY13) - A PERSPECTIVE
SALIENT POINTS
• Monetary Measures:
- Repo rate cut by 25 bps to 7.75%. Consequently the reverse repo and the MSF (Marginal Standing
Facility) rate stand reduced to 6.75% and 8.75% respectively
- Bank rate also adjusted downwards to 8.75%
- CRR has been cut by 25 bps to 4.00%
• GDP growth: FY13 estimate revised down to 5.5% from 5.8% projected earlier. This is mainly due to
sluggish external demand and sustained weakness in domestic investment activity. Expects recent reform
measures to have an impact over the medium term and help economy recover.
• Inflation: Headline inflation, as measured by WPI, also revised down to 6.8% (from 7%) factoring in
the recent developments. However expects inflation to remain range-bound in coming quarters and
reiterated that tangible progress on supply constraints and fiscal consolidation can help inflation
moderate on a sustained basis.
• Money Supply and Credit Growth: M3 projections cut to 13% (from 14%), while non-food credit
growth projections retained at 16%.
10.0
(%) Reverse repo rate Repo rate CRR
9.0
8.0
7.0
6.0
5.00
5.0
4.75
4.0
3.0 3.25
2.0
1.0
0.0
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Source: RBI
The policy outcome was along expected linesreflecting the RBI’s efforts to boost growth – repo, CRR
and SLR have been cut by 75 bps, 75 bps and 100 bps respectively over the last one year. The
moderation in headline inflation alongwith the recent measures by the government to address fiscal
deficit, seemed to have provided the central bank adequate comfort. It has indicated that the overall
weak growth environment needs to change - investment activity remains lackluster, falling
consumption demand and anemic export demand. RBI acknowledged the need to address this
worrisome trifecta and indicated that inflation pressures could be manageable.
1
2. At the same time, it has highlighted various downside risks stemming from the widening twin
deficits (current account and fiscal), potential spillover of global risks (given India’s rising capital
linkages) and risk aversion in the banking system due to credit quality concerns. While India
has been witnessing strong FII flows, FDI flows have been quite low. The recent increase in FII
investment limits in government and corporate debt should help in getting new flows as well as
deepen the local bond market.
The CRR cut is a pre-emptive measure to cushion the banking system from seasonal demand
for liquidity ahead of the financial year end. In recent weeks, the LAF borrowing levels have
edged lower but broadly remainedabove bank’s comfort zone. Historically, the banking system
has witnessed a rise in liquidity pressures during the last quarter of the financial year.
MARKETS
Indian treasury bond yields were volatile and closed almost flat as the RBI’s cautious outlook
statement weighed on investor sentiment.
Latest Yesterday’s close
1-year Gilt yield 7.75% 7.79%
5-year Gilt yield 7.83% 7.87%
10-year Gilt yield 7.85% 7.86%
5-year AAA Corporate Bond Yield 8.72% 8.72%
Equity markets initially moved up but closed in the red. Banking stocks also surrendered gains
clocked earlier during the day.
Select Equity Indices (% change since yesterday’s close)
BSE Sensex -0.56%
Nifty -0.41%
S&P CNX 500 -0.49%
BSE CD -0.51%
BSE Bankex -0.51%
BSE Realty -2.07%
OUTLOOK
Global economic growth continues to remain subdued, particularly in developed economies.
The high sovereign debt burden and limitations on the fiscal side have led central banks to adopt
unorthodox policy measures to support growth. This was reflected in Bank of Japan’s recent
measures - it joined the US Federal Reserve in adopting open-ended monetary easing (linked to
inflation target of 2%). Central banks in Emerging markets have also maintained an easy
monetary policy stance, while focusing on reining in export competitiveness.
2
3. 3m/3m SA, %yoy WPI momentum CPI (IW) momentum
25
20
15
10
5
0
-5
-10
2007 2008 2009 2010 2011 2012
Source : CEIC, Deutsche Bank
Amidst this uncertain environment, RBI should maintain its growth supportive stance.
However, a lot depends on the evolution of local and global risks. Inflation seems to be trending
down due to fall in core drivers and weakness in global commodity prices. However, the
government needs to usher in supply side reforms to ensure that the economy is not overtly
dependent on the vagaries of global commodity markets. In addition, boosting of investment
activity remains a key component for future growth.
39% 28%
Total Investment, LS 26%
36%
Public and Private, RS 24%
33% as % of GDP 22%
20%
30%
18%
27% 16%
14%
24%
12%
21% 10%
F1992 F1995 F1998 F2001 F2004 F2007 F2010 F2013E
Source : CSO, Morgan Stanley Research, E-Morgan Stanley Research Estimate
RBI will continue to do a balancing act to manage growth and inflation expectations.
Accordingly, the path to monetary easing is likely to be uneven. We expect market yields to
fluctuate in a narrow range over the near term and the focus will now shift to the Union
Budget. A portfolio of fixed income funds providing a combination of high coupon income
along with capital gains willwork well in the current environment.
3
