KBSL_Credit Policy Analysis

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Macroeconomics Update Credit Policy Analysis 27th October 27, 2009 The Reserve Bank of India announced its second quarter review of monetary policy. Despite the fact that most of the key rates policy rates remained unchanged as expect, the benchmark indices corrected by around 2% with the banking and real estate sectors plummeting the most. This is mainly because of the fact that the policy sets a tone for the beginning of the reversal of Monetary Easing. Key Rates (%) Repo Rate Reverse Repo Ra
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  www.kredent.com research@kredent.com Macroeconomics Update 27 th October 27, 2009 The Reserve Bank of India announced its second quarter review of monetary policy. Despite thefact that most of the key rates policy rates remained unchanged as expect, the benchmark indicescorrected by around 2% with the banking and real estate sectors plummeting the most. This ismainly because of the fact that the policy sets a tone for the beginning of the reversal of MonetaryEasing. Key Rates (%)Q1 FY10Q2 FY10 Repo Rate4.754.75Reverse Repo Rate3.253.25CRR55SLR2425 Source: RBI Some of the key highlights form the policy documents are: ã The share of agriculture in GDP has been declining over time, and as of 2008-09 it was 17.0 per cent.However, experience shows that a deficient rainfall can have a disproportionate impact on overalleconomic prospects and on the sense of well-being. Poor output will push up prices and depress rurallabor incomes. Given the inter-sectoral supply-demand linkages, the knock-on impact on theindustrial and services sectors can also be significant. ã Continuing the trend witnessed since Q2 of 2008-09, the two major components of demand, viz.,private final consumption expenditure and gross fixed capital formation (with a combined weight ofaround 88 per cent) decelerated further in Q1 of 2009-10. Government consumption, which hadincreased sharply in Q3 and Q4 of 2008-09 due to the fiscal stimulus measures and the Sixth PayCommission payouts, also decelerated in Q1 of 2009-10. While the direct impact of fiscal stimulus iswaning, its indirect impact on private consumption and investment will persist for some more time ã The GDP projection for 2009-10 for policy purposes remains unaltered at 6%, made in the First Quarter Review of July 2009. ã Keeping in view the global trend in commodity prices and the domestic demand-supply balance, thebaseline projection for WPI inflation at end-March 2010 is placed at 6.5 per cent with an upside bias. Thisis higher than the 5.0 per cent WPI inflation projected in the First Quarter Review of July 2009 as theupside risks have materialized Credit Policy Analysis  www.kredent.com research@kredent.com Macroeconomics Update Source: RBI ã The policy dilemma for India is different in some important respects from that of advancedeconomies as also other emerging market economies. First, most of these countries do not face animmediate risk of inflation. Indeed, in several advanced economies, the concerns were about apossible deflation, which are just about waning. On the other hand, India is actively confrontedwith an upturn in inflation – a rising WPI inflation and stubbornly elevated CPI inflation ã An issue of some immediate relevance is the critical need to downsize the governmentborrowing programme so as to help sustain a moderate interest rate regime . This is crucialfor investment demand to pick up on which hinge our long-term economic prospects ã Reversing monetary policy easing stems from the concern about inflation . WPI inflation hasturned positive, the base effect which has kept WPI low so far is now gone and CPI inflation hasremained stubbornly elevated. On a financial year basis, WPI has already increased by 5.95 per cent. In as much as monetary policy acts with a lag, there is need to act now ã The Reserve Bank’s inflation expectations survey shows that households expect inflation toincrease over the next three months as also one year. The lag with which monetary policyoperates suggests that there is a case for tightening sooner rather than late ã The balance of judgment at the current juncture is that it may be appropriate to sequence the‘exit’ in a calibrated way so that while the recovery process is not hampered, inflationexpectations remain anchored.  www.kredent.com research@kredent.com Macroeconomics Update ã The ‘exit’ process can begin with the closure of some special liquidity support measures. In thispolicy government has indeed removed some special liquidity support measures like: o The statutory liquidity ratio (SLR), which was reduced from 25 per cent of demand and timeliabilities to 24 per cent, is being restored to 25 per cent o The limit for export credit refinance facility [(under section 17(3A) of the RBI Act], which wasraised to 50 per cent of eligible outstanding export credit, is being returned to the pre-crisislevel of 15% o The two non-standard refinance facilities: (i) special refinance facility for scheduledcommercial banks under section 17(3B) of the RBI Act (available up to March 31, 2010),and (ii) special term repo facility for scheduled commercial banks (for funding to MFs,NBFCs, and HFCs) (available up to March 31, 2010) are being discontinued with immediateeffect ã In view of large increase in credit to the commercial real estate sector over the last one year andthe extent of restructured advances in this sector, it would be prudent to build cushion against likelynon-performing assets (NPAs). Accordingly, it is proposed that to increase the provisioningrequirement for advances to the commercial real estate sector classified as ‘standardassets’ from the present level of 0.40 per cent to 1 per cent Kredent Analysis: It is quite evident from the mentioned facts that the central bank will in any circumstances curtainthe rise in inflation and on the basis of the overall assessment the first priority among the stance of monetary policy for the remaining period of 2009-10 is to    Keep a vigil on the trends in inflation andbe prepared to respond swiftly and effectively through policy adjustments to stabilize inflationexpectations.    Thus we strongly believe that a rate hike is definitely on the cards in third quarter monetary policyfor FY2009-10 and hence as already mentioned in the report titled “Credit Policy Eve” one shouldstart booking profits from the rate sensitive sectors like banking, real estate and infrastructure andstart moving towards defensive sectors.  www.kredent.com research@kredent.com Macroeconomics Update Kredent Brokerage Services Limited Member: National Stock Exchange (Cash, FO & Currency)Bombay Stock Exchange Limited (Cash & FO) Disclaimer: This document is for private circulation only. Neither the information nor any opinion expressedconstitutes an offer or any invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (“related investment”). Kredent Brokerage Services Limited (KBSL)or any of its Associates or employees does not accept any liability whatsoever direct or indirect that may arisefrom the use of the information herein. KBSL and its may trade for their own accounts as market maker, blockpositioner, specialist and/or arbitrageur in any security of this Issuer(s) or in related investments, and may be onthe opposite side of public orders. KBSL, its affiliates, directors, officers, employees and employee benefitprogrammes may have a long or short position in any securities of this Issuer(s) or in related investments. Nomatter contained herein may be reproduced without prior consent of KBSL. While this report has been preparedon the basis of published/other publicly available information considered reliable, we are unable to accept anyliability for the accuracy of its contents. 4, Brabourne Road ; 4 th Floor ; Kolkata – 700001Ph: +91 033 2225 3783/4/5/6/7Fax :+91 033 2225 3788research@kredent.comwww.kredent.com
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