>India Week Ahead (MERRILL LYNCH)

Small mercies: Slack season cuts risks

■ Slack season cuts macro risks…
We breathe a sigh of relief as the economy shifts to a lower gear with the onset of the “slack” summer-monsoon season after March 31. This lays to rest the ghastly prospect of an external shock squeezing liquidity at peak industrial production.

■ … greater headroom for intervention if equities correct
This strengthens the RBI’s hand in coping with FII outflows if the on-going bear market rally cracks. Intervention – ~US$5bn – has been thus far constrained by reluctance to take chances with liquidity when credit offtake is at a seasonal peak. Besides, Tuesday’s 4Q08 balance of payments should scale down short-term external debt concerns. The RBI has already reported that US$28.1/43.1bn trade credit due was disbursed by November.

■ Delhi likely to push for bank lending rate cuts, but…
We think Delhi will likely push PSU banks harder for pre-poll prime lending rate (PLR) cuts (100bp BAS-MLe by 1HFY10) with credit offtake seasonally unwinding. Besides, Prime Minister Manmohan Singh, no less, yesterday called on private and foreign banks to follow PSU banks into cutting PLR. Do find our rates roadmap here.

■ … RBI OMO at best moderating U in yields on fiscal risks
Yet, the prospects of an April gilt rally are fading: read Ashish and me here. The RBI, after all, expectedly front-loaded net FY10 borrowing – ~Rs.1659bn (net of MSS maturity) - in the slack season. True, it has pre-committed itself to a massive 1HFY10 OMO of Rs800bn (~Rs1200bn BAS-MLe FY) to soften the blow. Even so, the fisc is likely to suck out a hefty Rs1500+bn BAS-MLe including states in 1HFY10.

■ WPI nearing ‘deflation’, CPI peaking, steel prices softer
We expect WPI inflation – 0.1% BAS-MLe Thursday – to sink to deflation. Doubledigit urban CPI inflation should begin to top off Thursday: do read our recent note here. By the way, steel prices are reversing the end-February spike.

■ Will Delhi announce Pay Commission disbursal?
We think there is a possibility Delhi could announce a disbursal date of the balance 40% of 6th Pay Commission arrears (~US$3bn) after April 1.

To see full report: INDIA WEEK AHEAD