As expected, the RBI has slashed the cash reserve
requirement (CRR) by 50 bps from the previous 6% to 5.5%. This move will
result in primary liquidity injection of around Rs 32000 crore into the
country’s banking system, which has seen the deposit growth rate
outpace the credit growth rate in recent times.
The RBI’s move came as a pleasant surprise for investors on the street, and the markets soared post the announcement of the CRR cut. The Sensex is currently trading strong at 17043.64 points, up 1.74% over yesterday’s closing value.
However, the central bank has decided to leave the key policy interest rates like repo and reverse repo rate unchanged at 8.5% and 7.5% respectively. This is because the RBI continues to maintain caution over headline inflation. Despite the recent fall in food and primary articles’ inflation due to abating food prices, inflation in other items like manufactured goods and fuel continue to remain firm, posing a risk going forward. Even on the food articles’ inflation, the RBI has stated that the prices of seasonal food items have depreciated sharply but others like protein-based items haven’t shown any significant downtrend.
In light of these facts, we expect the RBI to first review the Dec IIP numbers (which will provide a clear picture on the growth in industrial activity), then analyse the near-term trend in inflation, and finally take a call on the roll-back of key interest rates in its next mid-quarter review scheduled for Mar 2012. The interest cycle has certainly peaked out, and the only way the interest rate can go from here is southward.
Among the other highlights of the latest policy review, the RBI has scaled down its growth forecast from 7.6% (second quarter review) to 7% in line with slowing economic growth activity. Its projection for headline inflation by the end of March 2012 has been maintained at 7%, which looks comfortable in the current situation.
In conclusion, we at DSIJ believe that the RBI’s stance in its mid-quarter policy review today has brought great cheer to the market sentiments at a time when investors were preparing to digest yet another quarter of dismal corporate earnings. Coupled with this are the positive flows from Europe, US and the emerging markets of China and Brazil, which points towards a good year 2012 ahead. This rally that we have seen today is most likely to be carried forward, and investors would enjoy the ride.
The RBI’s move came as a pleasant surprise for investors on the street, and the markets soared post the announcement of the CRR cut. The Sensex is currently trading strong at 17043.64 points, up 1.74% over yesterday’s closing value.
However, the central bank has decided to leave the key policy interest rates like repo and reverse repo rate unchanged at 8.5% and 7.5% respectively. This is because the RBI continues to maintain caution over headline inflation. Despite the recent fall in food and primary articles’ inflation due to abating food prices, inflation in other items like manufactured goods and fuel continue to remain firm, posing a risk going forward. Even on the food articles’ inflation, the RBI has stated that the prices of seasonal food items have depreciated sharply but others like protein-based items haven’t shown any significant downtrend.
In light of these facts, we expect the RBI to first review the Dec IIP numbers (which will provide a clear picture on the growth in industrial activity), then analyse the near-term trend in inflation, and finally take a call on the roll-back of key interest rates in its next mid-quarter review scheduled for Mar 2012. The interest cycle has certainly peaked out, and the only way the interest rate can go from here is southward.
Among the other highlights of the latest policy review, the RBI has scaled down its growth forecast from 7.6% (second quarter review) to 7% in line with slowing economic growth activity. Its projection for headline inflation by the end of March 2012 has been maintained at 7%, which looks comfortable in the current situation.
In conclusion, we at DSIJ believe that the RBI’s stance in its mid-quarter policy review today has brought great cheer to the market sentiments at a time when investors were preparing to digest yet another quarter of dismal corporate earnings. Coupled with this are the positive flows from Europe, US and the emerging markets of China and Brazil, which points towards a good year 2012 ahead. This rally that we have seen today is most likely to be carried forward, and investors would enjoy the ride.
Key Policy Rates
|
Dec-11
|
Jan-12
|
Repo Rate
|
8.5
|
8.5
|
Reverse Repo Rate
|
7.5
|
7.5
|
CRR
|
6
|
5.5
|
SLR
|
24
|
24
|
