Tuesday, 30 October 2012

Deciphering RBI's Monetary Policy - 30th October 2012

Metcon Finance's Take on the RBI's Monetary Policy Announcement
Tuesday, 30th October, 2012
Mumbai, India

Today the Reserve Bank of India (RBI) cut the CRR by 25 bps to 4.25% and left traders, investors and analysts disappointed with no change in the RBI’s interest rate (Repo Rate) at 8%. While the Equity & Currency markets have not seen this in good light, we at Metcon Finance are analyzing Governor Subbarao’s statement probably more carefully than we ever have.

He mentioned that inflation will continue to be sticky at 7-8% which will be mainly driven by supply-side constraints and high commodity prices. He said that the RBI expects commodity rates to continue to remain high and probably even inch up, which we believe is an indication of a high likelihood of further easing by Japan/ECB/China along with the US FED’s QE3. As the US Presidential elections take place next week, it is only obvious and absolutely necessary that we also understand the RBI’s as well as GoI’s view with respect to the same. After speaking to Wealth managers, Portfolio Managers for Institutions as well as HNI’s, we understand that markets would cheer Governor Mitt Romney’s victory over President Barack Obama as the latter has, as felt by many economists across the United States, failed to revive the American economy and consequently also dented the progress of various nations in strengthening their respective economies.

The signalling by RBI Governor Subbarao that the commodity prices will be sticky also points to strong American Equity markets till the end of 2012, where we expect the S&P 500 to make new highs and consequently Nifty to touch 6100 levels. However after touching the new high, we expect that between January and March we may witness a 6-10% correction in the American Equity markets which may lead to a fall also in the Indian Equity Markets by 7-10%.We expect the Nifty to find support between 5520 and 5750. Subbarao mentioned that we can expect to see some easing in the Monetary policy between January & March, which we believe would be a time where either American & European markets correct or core inflation in India eases to sub 5% levels or both.

On the policies and economic front, we expect the Indian Government to outperform people’s expectations, especially in the Infrastructure, Telecom, SME & Mining segments. The Cabinet reshuffling and appointment of younger and more vibrant leaders points at a training mode of Rahul Gandhi's favourites for 18 months, the duration remaining for the 2014 National General elections. According to a recent poll by CNN-IBN, people would prefer Rahul Gandhi over Manmohan Singh as the Congress' Prime Ministerial candidate, and the reshuffling on Sunday only confirms the similarity in the voters' views and the Congress' Top Masterminds.

Coming to the Indian Rupee, it is again beginning to see some weakness after jumping nearly 10% in 5 weeks. However, we are of the opinion that the US Dollar has strong resistance between 54.30 and 55.50 and the UPA Government's newly found aggression in implementing policies, change in stance of the RBI gradually towards growth, lower Oil prices and change in investor sentiment will help the Rupee become stable at 50-52 levels in the next 2-3 months.

The above views indicate a fairly bullish stance maintained by us in the short-to-medium term, however, we do not rule out the possibility of Nifty falling to 5250, in case our assumptions fall short or in case another speed bump comes up in Europe’s path of recovery.

Shaurya Mehta
Metcon Finance Ltd.