Amid increasing Inflationary pressure and Worsening Global Sentiment Reserve Bank of India (RBI), the Central Bank of Country, continued its hawkish stance and hiked key policy rates by 50 basis points (bps) on Tuesday. However, it retained the Gross Domestic Product (GDP) growth projection at 8% with negative outlook.
GDP represents the Market Value of all the goods & Services produced in a country, over the period of a year. Industrial Production is a measure (it’s really an Index) of the activity/output in the Industrial or productive segment of the Economy. Movements in many areas of the economy are closely related to changes in GDP, so it is a good analytical tool. This number eliminates the effects of Inflation & thus measures the actual volume of production.
Real Growth in GDP has got a Positive Impact – it’s good for the market as well as Indian Economy.
RBI increased the policy Repo Rate under the Liquidity Adjustment Facility (LAF) by 50 bps to 8% from 7.5% earlier.
Accordingly the Reverse Repo Rate under the LAF, determined with a spread of 100 bps below the repo rate, automatically adjusts to 7.0%.
Retaining the growth projection at 8% RBI said, “The May 3 projection of 8% GDP growth rate was based on the assumption of a Normal Monsoon and Crude Oil Prices averaging US$ 110 per barrel. Subsequent data suggest that this projection remains valid. Therefore, the baseline projection of real GDP growth for the current year has been retained at 8.0%.”
While announcing the Credit Policy RBI said that the 2 broad considerations that went into decision behind the continued anti-Inflationary stance are strong demand pressure and there is no evidence, as yet, of a sharp or broad-based slowdown in growth.
RBI further said that the actual Inflation so far has been even higher than expected. In particular, non-food manufactured product Inflation has been significantly higher than the average rate of 4% over the last six years.
Inflation is detrimental to Stock Prices. Higher Inflation leads to higher Interest Rates & lower Price/Earnings (P/E) Multiples & generally makes business houses & Corporate India less happy, as their Profits & Net Operating Margins are reduced.
Another factor that RBI pointed while announcing the Credit Policy was the volatility in Crude Oil prices in International Market. The recent increase in domestic administered fuel prices and the minimum support price for certain food items will also keep Inflation under pressure, said RBI.
RBI pointed out that although several indicators such as Exports and Imports, Indirect Tax Collections, Corporate Sales and Earnings and Demand for Bank Credit suggest that demand is moderating, but there is no evidence of any sharp or broad-based slowdown in growth.
RBI expects that the 11th Consecutive Policy Rate hike will reinforce its effort to reign Inflation and the credibility of the commitment of Monetary Policy to control Inflation will be reinforced.
Meanwhile, the benchmark Sensex of Bombay Stock Exchange (BSE) reacted negatively to the 50 bps hike and was trading 1.50% down or 283 points at 12:20 Noon. All 14 stocks of Bankex (Banking Index) were trading in Red and the Index was 2.41% or 313 points down at the same time.
Signaling about the Future Stance RBI said, “The Monetary Policy stance will depend on the evolving Inflation trajectory, which in turn, will be determined by trends in Domestic Growth and Global Commodity Prices. A change in stance will be motivated by signs of a sustainable downturn in Inflation.”
Speaking on the risk factors and major concerns for the RBI as well as Government it said, “The Sovereign debt problems that have beset the euro area over the past year now threaten larger Economies in the region.”
The Central Bank said, “Crude oil prices are generally still high compared with last year.”
Speaking about the Inflation outlook going forward RBI outlined factors like the Overall performance of the South-west monsoon, Crude Oil Prices whose outlook for the near future is uncertain, policy decisions with regard to increase in prices of petroleum products and other administered items will have a significant influence on inflation.
RBI revised the baseline projection for WPI inflation for March 2012 upward to 7.0% from 6% projected earlier on May 3. The apex bank cautioned that Inflation is expected to remain elevated for a few more months, before moderating towards the later part of the year.
RBI said that after 11 Consecutive Policy Rate hikes scheduled Commercial Banks have been raising their Deposit and Lending Rates and since March 2010 banks have raised their Modal Term Deposit rate by 225 basis points.
Liquidity conditions have generally remained in deficit mode so far this fiscal and the average daily net injection of liquidity through the LAF window during this year was around Rs.48,000 crore.
RBI revised the Credit Growth Projection to 15.5% from 16.0% announced on May 3. Non-food bank credit growth projection has also been revised downwards from 19.0% to 18.0%.
Bharat Sahni
PlanUrMoney 