Download Expert’s Report On Impact Of RBI Policy On Stock Markets

RBI’s Fifth Bi-Monthly Monetary Policy Review (2018-19)

Market Impact

The market had been anticipating the RBI to hold rates and things have turned out as per expectations.

MPC decision to bring down SLR from 19.5% to 18% in a phased manner by reducing 25 bps from January—March quarter will be positive for the markets specially for banks & NBFC, as it would improve the current liquidity crunch which is going on in the economy.

The halt in rate hike by the RBI, will bring in positive cheer for the Banks, NBFC & Auto Industry. Currently the auto industry is facing a de growth across all categories due to rise in costs led by rising interest rates and insurance costs.

This move by the RBI will bring in some relief for the auto industry and the NBFC space which is facing liquidity crisis.

Keeps Interest rates unchanged.. Stance: Calibrated Tightening

 MPC keeps repo rate unchanged at 6.5%.
 The reverse repo rate stands unchanged at 6.25%.
 The rate for Marginal Standing Facility stands at 6.75%.
 MPC keeps stance at ‘calibrated tightening’.
 MPC votes 6-0 to keep repo rate on hold.
 RBI cuts SLR by 25 basis points starting January 2019 quarter.
 SLR is to be brought down to 18%.
 The cut in SLR is to happen in a phased manner.
 MPC retains FY19 GDP growth projection at 7.4 percent
 MPC pegs H1 FY20 inflation at 3.8-4.2 percent
 MPC cuts H2 FY19 inflation forecast to 2.7-3.2 percent from 3.9-4.5 percent earlier
 MPC voted 5-1 to keep stance at ‘calibrated tightening’; Dholakia voted for neutral stance
 CRR has remained unchanged at 4%.
 Although, MPC maintained their growth forecast for FY19 at 7.4% YoY, we estimated it a bit lower at 7.2% YoY, mainly due to moderation in private consumption. Private consumption slowed down possibly on account of moderation in rural demand, subdued growth in kharif output, depressed prices of agricultural commodities and sluggish growth in rural wages.
 So, we believe if food inflation do not increase, growth decelerate and Fed lowers its hawkish stance (as indicated by fed president Powell), given the decline in commodity prices which may lower inflation in U.S., RBI may give a soft stance in its next policy meeting.

India’s GDP growth slowed down to 7.1% YoY in Q2of FY19, weighed down by moderation in private consumption and a large drag from net exports. Private consumption slowed down possibly on account of moderation in rural demand, subdued growth in kharif output, depressed prices of agricultural commodities and sluggish growth in rural wages.

However, growth in government final consumption expenditure (GFCE) strengthened, buoyed by higher spending by the Central Government. Gross fixed capital formation (GFCF) expanded by double-digits for the third consecutive quarter, driven mainly by the public sector’s investment on national highways and rural infrastructure, which was also reflected in robust growth in cement production and steel consumption.

Growth of imports accelerated at a much faster pace than that of exports, resulting in net exports pulling down aggregate demand.

On the supply side, GVA growth too decelerated to 6.9% YoY in Q2, reflecting moderation in agricultural and industrial activities. Slowdown in agricultural GVA was largely the outcome of tepid growth in kharif production.

Within industry, growth in manufacturing decelerated due to lower profitability of manufacturing firms, pulled down largely by a rise in input costs, while that in mining and quarrying turned negative, caused by a contraction in output of crude oil and natural gas.

Growth in electricity, gas, water supply and other utility services strengthened. Services sector growth remained unchanged at the previous quarter’s level. Growth in public administration and defence services accelerated sharply.

Outlook: According to MOC, going forward, lower rabi sowing may adversely affect agriculture and hence rural demand. Financial market volatility, slowing global demand and rising trade tensions pose negative risk to exports.

However, on the positive side, the decline in crude oil prices is expected to boost India’s growth prospects by improving corporate earnings and raising private consumption through higher disposable incomes. Increased capacity utilization in the manufacturing sector also portends well for new capacity additions. There has been significant acceleration in investment activity and high frequency indicators suggest that it is likely to be sustained.

Credit off take from the banking sector has continued to strengthen even as global financial conditions have tightened. FDI flows could also increase with the improving prospects of the external sector. The demand outlook as reported by firms polled in the Reserve Bank’s IOS has improved in Q4. As a whole, GDP growth for FY19 has been projected at 7.4% YoY (7.2-7.3% in H2) same as in the October policy, and for H1 of FY20 at 7.5% YoY, with downside risk.

India’s CPI inflation declined from 3.7% YoY in September to 3.3% YoY in October. A large fall in food prices pushed food group into deflation and more than offset the increase in inflation in items excluding food and fuel.

Within the food and beverages group, deflation in vegetables, pulses and sugar deepened in October. Among other items, there was a broad-based softening across food items, especially cereals, milk, fruits and prepared meals.

Inflation, however, showed an uptick in meat and fish, and non-alcoholic beverages. Inflation in the fuel and light group remained elevated, driven by liquefied petroleum gas prices in October, tracking international petroleum product prices.

CPI inflation excluding food and fuel accelerated to 6.1% YoY in October; adjusted for the estimated HRA impact, it was 5.9% YoY. Transport and communication registered a marked increase, pulled up by higher petroleum product prices, transportation fares and prices of automobiles.

A broad-based increase was also observed in health, household goods and services, and personal care and effects.

However, inflation moderated significantly in clothing and footwear, as also housing on waning of the HRA impact of central government employees.

Outlook: According to MPC, there have been several important developments since the October policy which will have a bearing on the inflation outlook. First, food group is slipping into deflation. At a disaggregated level, deflation in pulses, vegetables and sugar widened, while cereals inflation moderated sequentially.

The broad-based weakening of food prices imparts downward bias to the headline inflation trajectory, going forward.

Secondly, in contrast to the food group, there has been a broad-based increase in inflation in non-food groups.

Thirdly, international crude oil prices have declined sharply; the price of Indian crude basket collapsed to below US$60 a barrel by end-November after touching US$85 a barrel in early October. However, selling prices, as reported by firms polled in the Reserve Bank’s latest IOS, are expected to edge up further in Q4 on the back of increased demand.

Fourthly, global financial markets have continued to be volatile with EME currencies showing a somewhat appreciating bias in the last one month.

Finally, the effect of the 7th Central Pay Commission’s HRA increase has continued to wane along expected lines. Taking all these factors into consideration and assuming a normal monsoon in 2019, MPC projected that inflation will be at 2.7-3.2% YoY in H2 of FY19 and 3.8-4.2% YoY in H1 of FY20, with an upside risks.