PersonalFN’s expectation from 1st Quarter Review of Monetary Policy

July 27, 2010 - PRLog -- The under-mentioned factors enable us to expect that the Reserve Bank of India (RBI) may continue to adopt the calibrated exit path, and increase key short-term lending and borrowing rates by 25 basis points in it first quarter review of monetary policy, thus making policy rates more relevant to the current economic growth.

Hence,

     Repo rate may be increased from 5.50% to 5.75%
     Reverse repo rate may also be increased from 4.00% to 4.25%
     Cash Reserve Ratio (CRR) may be kept unchanged at 6.00%

Inflation:
After showing a minor cool-off in May 2010, the headline inflation (as measured by the Wholesale Price Index) for the month of June 2010 (data released in July 2010) continued to inch-up in the double-digit space at 10.55% on account of increase in fuel, food and metal prices. Moreover, WPI inflation numbers for April 2010 were also revised upwards sharply, from 9.59% to 11.23%.

A noteworthy point is that this is the fifth consecutive month that the WPI inflation has been in double-digits. Moreover, given the deregulation of fuel prices in the last week of June 2010, the WPI inflation for July 2010 is also expected to maintain the uptrend.

However, we believe that sign of good monsoon, would improve the chance of good harvest, which may thus lead to RBI projecting headline inflation moderating to around 6.5% - 7.0% by year end, supported by the resultant softening of food prices and waning out of base effect.

Index of Industrial Production:

The Index of Industrial Production (IIP) for May 2010 (data released in July 2010), mellowed down to 11.5%, after showing a good run-up since October 2009. The numbers for April 2010 were also revised downwards to 16.5% from the original 17.6%.


Nevertheless, this is the eighth consecutive month that the IIP numbers are floating in double-digits helped by:

   * Robust domestic consumer demand
   * Expanding exports
   * Higher infrastructure spending

However, taking into account the fact that such buoyant IIP numbers are due to base effect waning, RBI in our opinion may refrain from being aggressive on policy rate stance.

GDP growth:

During the month of July 2010, the International Monetary Fund (IMF) revised the growth projections for India in 2010 to 9.5%, as it believes that the growth story during the year would be driven by favourable financial conditions and robust corporate profits. However, being a little cautiously optimistic, Finance Minister – Mr. Pranab Mukherjee at a CII conference said, “Though IMF has recently upgraded its forecast of GDP for the year 2010-11 to 9.5%, I am a bit conservative, and am confident that the growth in the current year should be around 8.5% and our target will be to cross the double digit barrier by 2011-2012”. Moreover, the Prime Minister’s Economic Advisory Council (PMEAC) has also considered revising its GDP growth rate forecast to 8.5%, (from 8.2% earlier) thus making it in tandem with the forecast of the Finance Ministry.

Hence, taking this into account, we believe that RBI too may align its GDP projection for 2010-11 to 8.5% and make policy rates more benign, which will unhurt the economic growth.

We will keep a close watch and provide our review on RBI’s action for its first quarter review of monetary policy 2010-11 (scheduled on July 27, 2010).

Watch this space for more updates from PersonalFN
(http://www.personalfn.com)

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