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India Monetary Policy
by Group Economics
April 2015
Summary & Overview

The RBI held the benchmark Repo rate at 7.5% in its
April 7 Meeting.
Governor Rajan also chided banks for not passing
prior rate cuts. Following his remarks, a number of
banks reduced their base rates.
Headline consumer inflation rose to 5.4% in
February. However, inflationary pressures remained
contained, with Core CPI falling to 4.1% in February.
India’s external position is much more secure than
before, with FX reserves at USD343bn.
Reflecting increasing confidence in India’s economic
prospects, Moody’s upgraded India’s outlook from
stable to positive.
The RBI announced a number of regulatory changes,
including measures to allow Indian Corporations to
issue Rupee-denominated bonds overseas.
NAB Economics is forecasting another 25bp cut to
the Repo rate in 2015– most likely in the June
quarter, with the year-end Repo rate expected at
7.25%.
Further rate cuts are possible but depend on : path
of food prices and the monsoon rains; the supply
response (land, power, etc) and possible external
uncertainty.







The RBI’s decision was largely anticipated, given the
previously ‘front-loaded’ rate cuts in January and March. In
its Statement, the RBI highlighted that recent
unseasonal rains had generated some uncertainty and
that banks had not passed on the previous rate cuts.
With regard to weather disturbances, the Farm Ministry
indicated that there could be a 4-5% decline in the wheat
crop. Recognising the potential negative impact on affected
farmers, Prime Minister Modi indicated an increase in the
compensation package to be provided to distressed
farmers.
On interest rates, Governor Rajan chided the banks for not
passing on the previous rated cuts. He also highlighted the
‘tepid’ pace of credit growth (9.5% over the year to March)
and easing liquidity as factors enabling banks to cut rates.
More specifically, he suggested that banks should compute
their lending rate based on the marginal cost of funds
(which are more sensitive to the policy rates), instead of
average costs.
Credit & Deposit growth
Indian Banking: Credit & Deposit Growth
30
25
Credit
RBI’s Decision
20
YOY
At its April, 7th meeting, the RBI:

Deposit
Maintained the policy Repo rate at 7.5%; the MSF
(Marginal Standing Facility) and Reverse Repo Rate
were held at 8.5% and 6.5% respectively;

Kept the Cash Reserve ratio at 4%

Continued providing liquidity under overnight repos at
0.25% of banks’ NDTL (Net Demand & Time Liabilites),
and 7-day and 14-day term repos at 0.75% of banks’
NDTL.
15
10
5
Indian Policy Rates
Mar-15
Mar-14
Mar-13
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
0
Following the remarks by the Governor, a number of banks
announced a reduction in their base rate, the minimum
lending rate. SBI indicated a 15bp cut in its base rate to
9.85%; ICICI 25bps to 9.75%; and HDFC 15bps to 9.85%.
Policy Rates: Repo, Reverse Repo & MSF
12
Inflation and growth
10
Headline consumer inflation increased a touch in February,
rising by 5.4% over the year (5.2% in January). Food prices
(6.8%) remained somewhat elevated, due largely to fruits
(8.9%), vegetables (13%), dairy (9.2%) and pulses (10.6%).
By contrast, the wholesale price measure turned negative,
impacted by falling fuel prices.
%ge
8
6
4
MSF
Repo
Reverse Repo
2
Source: DX/RBI
Apr-15
Oct-14
Apr-14
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
Apr-10
Oct-09
Apr-09
Oct-08
Apr-08
Oct-07
Apr-07
0
Underlying inflationary pressures though, remain
contained. This can be seen in the declining trend in Core
CPI (ex fuel and food), which has fallen over the past 9
months to a low of 4.1% in February. This is partly due to
the impact of lower fuel prices on transport costs. Besides,
National Australia Bank – Group Economics | 1
India GDP & Monetary Policy
10 April 2015
housing costs have eased partly due to revisions in the
coverage of the new CPI measure; and muted demand for
health, education and services has restrained price
increases in these categories. Further, rural wage growth
has eased substantially, rising by 5.5% in January 2015, c.f.
15% during 2007-13, according to the Labour Bureau.
durables) has been weak, but capital goods has shown
strong growth. That said, it is still too early to call this the
start of a new capital investment cycle, although progress
on clearing stalled projects will help.
Industrial Production - Sectoral
Headline inflation
Industrial Production: Sectoral
20
15
Indian Inflation: WPI vs CPI
%ge YOY
20
10
5
%ge YOY
15
0
10
-5
5
-10
Industrial Workers CPI
New CPI
Mining
Mfg
Electricity
Jan-15
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jan-09
Feb-15
Feb-14
Aug-14
Feb-13
Aug-13
Feb-12
Aug-12
Feb-11
Aug-11
Feb-10
Aug-10
Aug-09
Feb-09
Feb-08
Aug-08
Feb-07
Aug-07
WPI
-5
IP
-15
Jul-09
0
Source: CEIC
Source:CEIC
Industrial Production - Use
Core inflation
Industrial Production: Use-Based
60
%GE YOY
Core Inflation in India: CPI vs WPI
9.00
8.00
50
Basic
Capital
40
Inter
Consumer
30
7.00
CPI
20
%ge YOY
WPI
6.00
5.00
10
0
4.00
-10
3.00
-20
2.00
-30
1.00
Jan-15
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jan-09
Feb-15
Oct-14
Jun-14
Feb-14
Oct-13
Jun-13
Jul-09
-40
0.00
Source: CEIC
Source: NAB Economics
The RBI’s survey of household inflationary expectations is a
useful forward-looking price indicator, and provides an
insight into future behaviour of prices, and hence interest
rates. In the most recent (March 2015) survey, household
inflation expectations for the year head rose slightly (from
8.9% to 9.1%). However, they remain in single digits, and
well below levels since September, 2014. This does give
some confidence that the RBI will cut rates again.
External and Financial
Inflation Expectations
EQUITIES
The equity market seems to have shrugged off the rate
decision, and continues to gain strength. Data from SEBI
revealed that foreigners continue to have a strong appetite
for Indian shares, buying a net USD41.4 million of shares,
taking the year’s inflows at USD6.3bn, the highest in Asia.
Coal India, Reliance Industries and Tata Consultancy have
been among the stronger performers.
Household Inflation Expectations: 1-Year ahead
Mumbai Sensex 100
18
10,000
9,000
16
9,000
8,000
14
8,000
12
%ge
7,000
7,000
Index
10
6,000
8
6,000
6
5,000
5,000
08-Apr-15
19-Nov-14
02-Jul-14
12-Feb-14
25-Sep-13
08-May-13
19-Dec-12
3,000
01-Aug-12
3,000
14-Mar-12
Industrial production has shown positive growth over the 3
months to January, 2015. Mining has still been in the
doldrums, although electricity, and more importantly given
its relatively larger share, manufacturing has shown
positive growth. By use, consumer goods (particularly
4,000
26-Oct-11
Source: RBI
4,000
08-Jun-11
Mar-15
Sep-14
Mar-14
Sep-13
Mar-13
Sep-12
Mar-12
Sep-11
Mar-11
Sep-10
Mar-10
4
Source: Datastream
India’s rupee has been trading around the USD62-63 range,
and FX volatility remains broadly muted. However, India’s
National Australia Bank – Group Economics | 2
India GDP & Monetary Policy
10 April 2015
REER (Real Effective Exchange rate) has risen noticeably
over the past few quarters. The RBI noted this in its review
and suggested that it maybe a factor constraining export
growth – although it also made the point that it did not
target any particular level for the exchange rate.
FDI and Portfolio Inflows
FDI & Portfolio Inflows in India
20,000
FDI
Portfolio
15,000
FX Rate:
30
30
35
35
40
40
45
45
Depreciation
50
USD Millions
10,000
INR/USD
0
-5,000
50
55
55
60
60
65
65
70
70
75
75
5,000
Dec-14
Jun-14
Sep-14
Mar-14
Dec-13
Jun-13
Sep-13
Mar-13
Dec-12
Sep-12
Jun-12
FX Reserves
09-Apr-15
17-Nov-14
24-Jun-14
29-Jan-14
10-Sep-13
22-Apr-13
30-Nov-12
11-Jul-12
05-May-11
27-Sep-11
16-Feb-12
Source: DX
Mar-12
Dec-11
Sep-11
Jun-11
-10,000
India's FX Reserves: USD- M
350,000
Source: Bloomberg
Effective Exchange rates
300,000
Effective Exchange Rates: Nominal and Real
120
U SD M
REER
NEER
110
200,000
100
90
Source: Bloomberg
Feb-15
Feb-14
Aug-14
Feb-13
Aug-13
Feb-12
Aug-12
Feb-11
Aug-11
Aug-10
Feb-10
Aug-09
Feb-09
Aug-08
Feb-08
Aug-07
Feb-07
Aug-06
Feb-06
60
Source: BIS
Whilst exports have been constricted by the higher
exchange rate, imports too have fallen in nominal terms
due to lower crude oil prices. Besides, gold purchases
remained broadly contained. The RBI also indicated that
service exports have held up, particularly for software and
tourism, ensuring limited pressure on the Current Account
(the deficit for the December quarter was at -1.6%.
Strong capital inflows from both foreign direct investments
as well as strong debt and equity portfolio inflows from
overseas investors have more than covered India’s deficit
shortfall and have swelled India’s foreign exchange
reserves. The latest RBI data reveal that they have increased
to USD 343billion, and provide a meaningful buffer against
any volatility which may arise from anticipated US Federal
Reserve rate hikes later in the year.
Moody’s has upgraded India’s outlook to positive, from
stable. This reflects a number of favourable developments:
increased
confidence
in
the
economic
outlook,
improvements in its institutional profile and confidence in
measures to boost infrastructure and ease business
regulations.
Outlook
The RBI indicated that ‘Going forward, the accommodative
stance of monetary policy will be maintained, but monetary
actions will be conditioned by incoming data’.
Its aim was to achieve a below 6% inflation target by
January 2016, followed by a 4% target (the mid-point of the
proposed 4+/-2% target band) by March 2018.
Over the coming year, it expected inflation to evolve
around the current level (5.4%) till June 2016, moderate to
4% by August, and rise to 5.8% by the end of the year. This
pattern can be seen in the chart below, showing the
projection of ‘base effects’ over the year head.
National Australia Bank – Group Economics | 3
27-M ar-15
25-Jul-14
22-N ov-13
22-M ar-13
20-Jul-12
18-N ov-11
18-M ar-11
16-Jul-10
70
13-N ov-09
80
13-M ar-09
150,000
11-Jul-08
Index 2010 = 100
250,000
India GDP & Monetary Policy
10 April 2015
Tom Taylor
CPI Inflation: Base & Momentum Effects
Head of International Economics
CPI Inflation: Base & Momentum Effects
Tom_Taylor@national.com.au
2.00
Base
Momentum
Mthly Change
1.50
1.00
% ge
0.50
0.00
-0.50
-1.00
-1.50
Feb-16
A ug-15
Feb-15
A ug-14
Feb-14
A ug-13
Feb-13
-2.00
Source:NAB Economics
NAB Economics is forecasting one more rate cut (during
the June quarter), which will ensure a Repo rate of
7.25% by the end of 2015. Further rate cuts are possible,
but depend on: the outlook for food prices and the
coming monsoon rains; progress on improving the
supply side of the economy; potential external
uncertainty (e.g. from expected rate hikes from the Fed).
Financial and Regulatory measures
The monetary policy announcement was accompanied by a
number of regulatory developments. Some of the key
elements include:

Allowing trading of Government bonds by retail
investors. This could potentially lessen demand for
certain types of bank deposits.

Facilitating the issue of rupee bonds overseas by Indian
corporations. Overseas investors will be able to enjoy
high yields, and at the same time Indian corporations
will not be subject to currency risk. This could be akin
to ‘dimsum’ bonds issued by Chinese corporations in
Renminbi.

Permit banks to invest in each other’s bonds for trading
purposes – subject to restrictions.

Doing away with the ‘Calendar of Reviews’ to be
deliberated by bank boards. Instead, bank boards are
to focus on key issues: business strategy, risk,
compliance, financial reporting integrity, financial
inclusion and human resources.

Increasing the cap on borrowing limits of clients in the
Micro finance sector.
John Sharma
Economist – Sovereign Risk
john.sharma@nab.com.au
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