>RBI’s mid quarter monetary policy review (December 16, 2011)

On the backdrop, of challenging global & domestic economic environment RBI in its mid quarter review halted its monetary policy tightening measure as per our expectations. RBI decided to


• keep the cash reserve ratio (CRR) unchanged at 6%
• keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.5%
• Consequently, the reverse repo rate under the LAF will remain unchanged at 7.5% and the
marginal standing facility (MSF) rate at 9.5%.


The RBI's view on rates is based on
Growth momentum is weakening in the advanced economies amidst heightened concerns that
recovery may take longer than expected earlier.


This, combined with the slowing down of domestic demand, to which the monetary policy stance is also contributing, suggests that risks to the growth projection for 2011-12 made in the January


Review are on the downside.
Meanwhile, RBI maintained its inflation projection for March 2012 at 7% due to moderation in food inflation in November 2011 and expected moderation in aggregate demand leading to decline in non-food manufactured products inflation.


Outlook & View
RBI has clearly indicated a threat to domestic economy from uncertain global macro-economic
environment. As a consequence of all-round slower growth, inflation has also started declining, both in advanced countries and EMEs. This will affect the composition of capital flows from developed economies. On the domestic front, monsoon rains so far have been normal. The first advance estimates for the 2011-12 kharif season point to a record production of rice, oilseeds and cotton, while the output of pulses may decline. Fiscal deficit target of 4.6% has become a challenge due to various developments in macro economic environment. On the expenditure side, the subsidy burden will overshoot the budgeted amount in 2011-12 significantly, despite the recent revision in petroleum product prices.


As we have mentioned in our RBI’s monetary policy expectations report, among the four factors (higher inflation, interest rates, lack of reforms and currency depreciation), inflation has started to fall along with RBI intervention to arrest the rupee depreciation. This will help the economy to stablise from slowdown witnessed in near term. Also RBI has assured that monetary policy actions are likely to reverse the cycle, responding to the risks to growth. The halt of interest rate hikes is positive for the banking sector, which are facing challenges like slower growth of credit & deteriorating asset quality. RISH TRADER