RBI CREDIT POLICY - DID NOT LET DOWN EXPECTATIONS,REMAINED NON-EVENT!

By Ruma Dubey

The RBI Policy today was as expected – status quo, a non-event.

Under the current circumstances, this was the most logical thing to do. But everyone’s eyes and ears were on two things – the tone of the policy and whether Dr.Subbarao would give any roadmap of when the current money tightening measures will be eased.

First, the tone. As expected, it was “dovish”. This means there are no aggressive undertones to the document. On the other hand, a “hawkish” tone would have meant the exact opposite and that tone at this juncture would have culled the sentiments further. Thus the tone was more positive than more negative.

Secondly, there is no way the Governor could have given us a roadmap for the monetary easing. The aggressive measures were taken to anchor the falling rupee. It remains around Rs.59 levels but we do not know yet if these measures will work if Bernanke announces the start of QE easing from September. The moment a timeline is given by the Federal Reserve for this easing, we should be prepared to see dollars moving out of the emerging economies. It might not be a deluge as was once expected. The FIIs know that this is a certainty bound to happen and by now, they would have ruminated and digested this news.  But yes, there will be some pullback and that time would be crucial – for both the equity as well as the forex markets. RBI might have to wait till such time to ease tightening measures to ensure the rupee does not come crashing down further. Maybe we should be prepared for more pain over the next 8-10 weeks. But at the end of it, we should know that this outflow will stop. India continues to remain an opportunity which the FIIs simply cannot afford to ignore.  Yes, we have our issues but it is still not a banana republic. There are very sound companies working and listed in India. And simply put- FIIs have made money in India and that lure of money will get them back. Also, India is an emerging economy which simply cannot be ignored.

Today, the list of stock which have hit new 52-week lows has more fundamentally sound stocks than dud stocks. Valuations are today getting butchered. But therein lies the opportunity to stock up on quality, portfolio stocks.  The list of stocks hitting new lows runs over 10 pages while those of hitting new highs is hardly one-and-half page. Majority of the stocks are suspicious companies, penny stocks like Alufloride, Euro Leader, Exdon Trading, Vishvjyoti Trading, Sunbright stock and many more. Hardly 7-9 names are strong stocks like Natco, Biocon, Tech Mahindra, Fresenius, Asian Paints.  

For now, all eyes, as stated in yesterday’s Cover Feature, will be on the FOMC meet to get indications on QE easing. Till that clarity does not come, the markets and moods will remain lackluster.

Highlights of RBI’s Credit Policy

• Rates remain status quo; Repo rate at 7.25%, reverse repo at 6.25%, Marginal Standing Facility (MSF) Rate at 10.25, Bank rate at 10.25% and CRR at 4%.
• In the May Policy, the Reserve Bank projected GDP growth for 2013-14 of 5.7% , conditional upon a normal monsoon returning agricultural growth to its trend level. The outlook for industrial activity, however, was expected to remain subdued, and growth in services and exports was expected to stay sluggish owing to global growth not improving significantly. This growth has been revised downwards to 5.5%.
• In the May Policy, the Reserve Bank indicated that during 2013-14, WPI inflation will be range-bound around 5.5% and now RBI’s objective is to contain headline WPI inflation at around 5% in the short-term, and 3% over the medium-term. No roadmap for CPI was given.
• M₃ growth projection for 2013-14 has been retained at 13%, aggregate deposit growth at 14% and non-food credit of SCBs is projected to grow at 15%.
• RBI foresees the biggest risk to the macroeconomic outlook stems from the external sector.
• The next Mid-Quarter Review of Monetary Policy for 2013-14 will be on Wednesday, September 18, 2013.
• The Second Quarter Review of Monetary Policy for 2013-14 is scheduled on Tuesday, October 29, 2013.