>MONETARY POLICY PREVIEW (CITI)

Monetary Policy Preview – Status Quo Likely

■ Mixed Macro Back-Drop Could Prompt Status Quo — The domestic macro backdrop of the RBI’s monetary policy due on Tuesday 28th July is that of: (1) nascent signs of recovery but the monsoons casting dark grey clouds, (2) benign WPI inflation but soaring food prices, and (3) ample system liquidity but a near doubling of the borrowing program. Given the above, and the fact that since the financial crisis the RBI has aggressively cut policy rates (repo rate by 425bps to 4.75%; reverse-repo by 275bps to 3.25% and CRR by 400bps to 5%), we expect
the RBI to: 1) maintain status quo on rates, 2) continue with its objective of ensuring adequate liquidity, and 3) start tightening in 2Q 2010.

■ So What Should One Look Out For? — With Governor Subbarao saying that “improving communication at both technical and non-technical levels” and “demystifying the office of the governor” would be among the objectives during his tenure, it will be interesting to hear the RBI’s thoughts on: (1) the extent of system liquidity it is comfortable with and views on reversal of monetary accommodation, (2) balancing a high deficit and ensuring there is no crowding out, and (3) rising food prices and its influence on monetary policy.

■ RBI's Macro Forecasts — Given uncertainty on the outcome of the monsoons, the RBI could stick with its 6% GDP estimate – made prior to the positive election results. However, we could see higher guidance on inflation (currently 4% by end FY10), as well as some concern on the fiscal deterioration.

■ Downside Risks to our FY10 GDP Estimates — As mentioned in the 21 July Macroscope (‘Drought – No, Not Yet…But What If?’, CIRA report, https://www.citigroupgeo.com/pdf/SAP29224.pdf) with the rains playing truant this year a poor monsoon, or a worse case of a drought (classified as rainfall deficiency of >25%), would impact headline GDP (our base case GDP of 6.8%in FY10E could moderate to 5.8%, or in a worse case to 5.2% levels depending on the extent of damage).

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