Mid Quarter Monetary Policy Review | Banking

June 17, 2013

Mid Quarter Monetary Policy Review

Status quo maintained on rates; along expected lines
Policy Measures

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

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

As expected, the Reserve Bank of India (RBI), in its Mid Quarter Monetary Policy Review, maintained status quo on policy rates. The key policy rate ie Repo Rate stands unchanged at 7.25%. Consequently, the Reverse Repo Rate stands unchanged at 6.25% and the Marginal Standing Facility Rate and Bank Rate stand unchanged at 8.25%. The Cash Reserve Ratio continues to remain at 4.00% of banks NDTL. The RBI has maintained its cautious guidance and indicated that its policy stance would be determined by the 1) growth, 2) inflation and 3) balance of payments (BoP) situation. We expect an additional 50bp repo rate cut in FY2014; the timing of the same is likely to be data-determined.

Policy cautious ahead of inflationary and BoP risks

Despite the considerable moderation in headline WPI inflation (to 4.7% in May 2013 from an average of 7.4% in FY2013), the RBI has maintained a cautious stance in its policy. This can be attributed to 1) anticipation of upside pressures on inflation through second-round effects and 2) risk of a reversal in capital flows. Since May 2013, the INR has depreciated by 7% and this is likely to offset the positive impact of softening global commodity prices and stoke imported inflation. Our trade deficit for April and May 2013 has widened to USD37.9bn as against USD30.9bn in the corresponding period of the previous year. In addition, as the RBI acknowledged, capital flows have moderated reflecting risk-off sentiment triggered by apprehensions of possible tapering off of quantitative easing by the US Fed. So far in June, the equity markets have witnessed capital outflow of USD156mn by foreign institutional investors (FIIs) as against a robust inflow of USD3.8bn by them in May 2013. The RBI has also emphasized upside risks to inflation from second-round effects of high food prices and the recent increase in administered fuel prices on the overall trajectory of inflation. In this context, we believe that 1) the onset of a normal monsoon, 2) decent rabi production in FY2013 and 3) expectations of moderate hikes in minimum support prices (MSP) are likely to support moderation in food inflation and reduce the divergence between Wholesale Price Index (WPI) and Consumer Price Index (CPI) inflation.

Policy stance to be determined by growth, inflation and BoP

The RBI reiterated that its policy stance would continue to be determined by the trajectory of growth and inflation as well as assessment of the BoP situation. We expect additional repo rate cuts of about 50bp in FY2014; the timing of the same is likely to be data-determined. We expect the trajectory for WPI inflation to remain in the RBIs comfort-zone at least in the near-term. We also believe that the demand for gold is likely to be front-loaded and expect that moderation in gold imports going forward (along with stabilization in the INR) are likely to narrow the trade deficit. Put together, these factors could provide the RBI with headroom to cut rates in July 2013.
Please refer to important disclosures at the end of this report

Mid Quarter Monetary Policy Review

Exhibit 1: Trend in key policy rates

(%) 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 Sep-08 Sep-09 Sep-10 Sep-11 Dec-08 Mar-09 Dec-09 Mar-10 Dec-10 Mar-11 Dec-11 Mar-12 Sep-12 Dec-12 Mar-13 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 4.00 6.25 7.25 Repo rate Reverse Repo rate CRR

Exhibit 2: Divergence between WPI and CPI inflation

(%) 12.0 10.0 8.0 6.0 4.0 2.0 May-12 May-13 May-13 Jul-12 Nov-12 Dec-12 Jul-12 Mar-13 Jun-12 Aug-12 Sep-12 Feb-13 Oct-12 Jan-13 Apr-13 Sep-11 WPI Inflation CPI inflation 9.3

4.7

Source: RBI, Angel Research

Source: Mospi, RBI, Angel Research

Exhibit 3: Sharp INR depreciation since May 2013

58.0 56.0 54.0 52.0 50.0 48.0 46.0 May-12 Aug-12 Sep-12 May-13 Jan-12 Apr-12 Oct-12 Jan-13 Mar-12 Nov-12 Dec-12 Mar-13 Feb-12 Feb-13 Apr-13 Jun-12 Jul-12 Jun-13

Exhibit 4: Import cover of forex reserves, at 13 year low

(Months) 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 May-03 Nov-00 Jul-02 Mar-04 Sep-01 Jan-00 Jan-05 Import cover

May-08

Nov-05

Jul-07

Mar-09

Source: Bloomberg, Angel Research

Source: RBI, Angel Research

June 17, 2013

Nov-10

Sep-06

Jan-10

Mid Quarter 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 Pvt. 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 com pany'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 Pvt. 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 Pvt. 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 Pvt. 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 Pvt. 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 Pvt. 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 Pvt. Limited and its affiliates may have investment positions in the stocks recommended in this report.

June 17, 2013

Mid Quarter 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 Twinkle Gosar Tejashwini Kumari Akshay Narang Harshal Patkar Technicals: Shardul Kulkarni Sameet Chavan Sacchitanand Uttekar Derivatives: Siddarth Bhamre Institutional Sales Team: Mayuresh Joshi Meenakshi Chavan Gaurang Tisani Akshay Shah Production Team: Tejas Vahalia Dilip Patel Research Editor Production Incharge tejas.vahalia@angelbroking.com dilipm.patel@angelbroking.com VP - Institutional Sales Dealer Dealer Sr. Executive mayuresh.joshi@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 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 gosar.twinkle@angelbroking.com tejashwini.kumari@angelbroking.com akshay.narang@angelbroking.com harshal.patkar@angelbroking.com

CSO & Registered Office: G-1, Ackruti Trade Centre, Road No. 7, MIDC, Andheri (E), Mumbai - 93. Tel: (022) 3083 7700. Angel Broking Pvt. Ltd: BSE Cash: INB010996539 / BSE F&O: INF010996539, CDSL Regn. No.: IN - DP - CDSL - 234 2004, PMS Regn. Code: PM/INP000001546, NSE Cash: INB231279838 / NSE F&O: INF231279838 / NSE Currency: INE231279838, MCX Stock Exchange Ltd: INE261279838 / Member ID: 10500. 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.

June 17, 2013