3QFY2013 Monetary Policy Review | Banking

January 29, 2013

3QFY2013 Monetary Policy Review

RBI reduces repo by 25bp, CRR by 25 bp
Policy Measures
The Reserve Bank of India (RBI) in its Third Quarter Monetary Policy Review for FY2013 reduced the repo rate by 25bp from 8.0% to 7.75%. Consequently, the reverse repo rate stands adjusted at 6.75% and the marginal standing facility (MSF) rate and bank rate stand adjusted at 8.75%. The Cash Reserve Ratio (CRR) too has been reduced by 25bp from 4.25% to 4.0% of banks net demand and time liabilities (NDTL) since liquidity remains tight and due to persistence of the wedge between credit and deposit growth. The CRR reduction is expected to inject around `18,000cr of primary liquidity in the banking system.

Vaibhav Agrawal
022 3935 7800 Ext: 6808 vaibhav.agrawal@angelbroking.com

Bhupali Gursale
022-3935 7800 Ext: 6820 bhupali.gursale@angelbroking.com

Policy stance more supportive of growth

The RBI has further scaled down its growth forecast for FY2013 to 5.5% from 5.8% in its October policy review. Growth is likely to remain subdued for the fiscal year on the back of slowdown in private consumption, investment and exports. In light of the slowdown in growth and moderation in inflation, the RBIs policy stance is increasingly shifting towards supporting growth. At the same time, we believe that the RBI still remains cautious in its approach on account of any negative surprise emanating from inflation and the twin deficits, ie current account deficit and fiscal deficit.

But reiterates persistence of inflation risks in FY2014

The recent trend of moderation in inflation is positive for the interest-rate environment in the economy. Headline WPI inflation moderated for the third month to 7.2% in December 2012. Core (manufactured non-food) inflation too edged to a two-year low of 4.2%, well within the RBIs comfort level. The RBI has scaled its inflation forecast for FY2013 downwards to 6.8% from 7.5% in its October policy review. Going ahead in FY2014, the RBI expects inflation to remain range-bound at the current level. Earlier during the month the government partially deregulated diesel prices by allowing oil companies to hike retail prices gradually while allowing full price adjustment for bulk consumers. We believe that this move strengthens the governments efforts towards fiscal consolidation but release of suppressed inflation is likely to lend an upward bias to inflation going ahead. In that context, we believe that favorable movement in international crude oil prices and INR are pertinent for further moderation in inflation.

Please refer to important disclosures at the end of this report

3QFY2013 Monetary Policy Review

Policy Outlook
We believe that the RBI has adopted a balanced approach weighing the growth-inflation dynamics in its policy stance and it marks a material shift from its earlier rigidly hawkish policy stance. Going ahead we believe that the monetary policy stance is likely to be determined by the shaping up of the twin deficits and food inflation. As far as food inflation is concerned although it remains at worryingly high double-digit level, we believe that its trajectory is likely to improve as rabi sowing has progressed well so far and the hike announced by the government in Minimum Support Price (MSP) for rabi crops particularly wheat at 5% is moderate (as compared to generous MSP hikes for kharif crops). Moreover, core inflation at 4.2% is already within RBIs comfort level. Additionally, the recent policy moves towards fiscal adjustment such as the hike in diesel prices, thrust on divestment drive and indications of a fiscally prudent budget are also steps in the right direction and are likely to give the central bank more headroom to ease policy rates. However, the current account deficit at 5.4% of GDP in 2QFY2013 is alarming and presently this in our view is the key factor limiting headroom for the RBI to cut rates more aggressively. This is because aggressive rate easing could stoke demand for imports further and a weak currency would also lead to higher imported inflation. Secondly, attracting capital flows is key to financing the current account deficit and lower interest rates could discourage capital flows particularly debt inflows to finance the CAD. Therefore, we maintain our view on reduction in repo rate by about 100 bp in 2013.

January 29, 2013

3QFY2013 Monetary Policy Review

Exhibit 1: Moderation in headline WPI and core inflation

(%) 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Oct-11 Aug-11 Aug-12 Dec-11 Feb-12 Oct-12 Jun-11 Apr-11 Apr-12 Jun-12 Dec-12 7.75 6.75 4.00 May-12 Nov-12 Sep-12 Oct-12 Aug-12 Dec-12 Apr-12 Jan-13 6.8 5.5 Jun-12 Jul-12 4.2 7.2 Core Inflation WPI Inflation

Source: Office of Economic Adviser, Angel Research

Exhibit 2: Reduction in key policy rates

(%) 10.0 8.0 6.0 4.0 2.0 Repo rate Reverse Repo rate CRR

Source: RBI, Angel Research

Exhibit 3: Revision in growth and inflation projections

(%) 8.0 7.0 6.0 5.0 4.0 3.0 2.0 FY13 Monetary policy 1QFY13 Review 2QFY13 Review 3QFY13 Review 6.5 6.5 5.8 7.3 Real GDP estimate 7.0 WPI inflation estimate 7.5

Source: RBI, Angel Research

January 29, 2013

3QFY2013 Monetary Policy Review

Research Team Tel: 022 - 39357800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

January 29, 2013

3QFY2013 Monetary Policy Review

6th Floor, Ackruti Star, Central Road, MIDC, Andheri (E), Mumbai- 400 093. Tel: (022) 39357800
Research Team Fundamental: Sarabjit Kour Nangra Vaibhav Agrawal Bhavesh Chauhan Viral Shah Sharan Lillaney V Srinivasan Yaresh Kothari Ankita Somani Sourabh Taparia Bhupali Gursale Vinay Rachh Amit Patil Shareen Batatawala Twinkle Gosar Tejashwini Kumari Technicals: Shardul Kulkarni Sameet Chavan Sacchitanand Uttekar Derivatives: Siddarth Bhamre Institutional Sales Team: Mayuresh Joshi Hiten Sampat Meenakshi Chavan Gaurang Tisani Akshay Shah Production Team: Tejas Vahalia Dilip Patel Research Editor Production tejas.vahalia@angelbroking.com dilipm.patel@angelbroking.com VP - Institutional Sales Sr. A.V.P- Institution sales Dealer Dealer Sr. Executive mayuresh.joshi@angelbroking.com hiten.sampat@angelbroking.com meenakshis.chavan@angelbroking.com gaurangp.tisani@angelbroking.com akshayr.shah@angelbroking.com Head - Derivatives siddarth.bhamre@angelbroking.com Sr. Technical Analyst Technical Analyst Technical Analyst shardul.kulkarni@angelbroking.com sameet.chavan@angelbroking.com sacchitanand.uttekar@angelbroking.com VP-Research, Pharmaceutical VP-Research, Banking Sr. Analyst (Metals & Mining) Sr. Analyst (Infrastructure) Analyst (Mid-cap) Analyst (Cement, FMCG) Analyst (Automobile) Analyst (IT, Telecom) Analyst (Banking) Economist Research Associate Research Associate Research Associate Research Associate Research Associate sarabjit@angelbroking.com vaibhav.agrawal@angelbroking.com bhaveshu.chauhan@angelbroking.com viralk.shah@angelbroking.com sharanb.lillaney@angelbroking.com v.srinivasan@angelbroking.com yareshb.kothari@angelbroking.com ankita.somani@angelbroking.com sourabh.taparia@angelbroking.com bhupali.gursale@angelbroking.com vinay.rachh@angelbroking.com amit.patil@angelbroking.com shareen.batatawala@angelbroking.com gosar.twinkle@angelbroking.com tejashwini.kumari@angelbroking.com

Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE: INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946 Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302

January 29, 2013