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India Monetary Policy
Sep-14
Sep-13
Mar-14
Mar-13
Sep-12
Sep-11
Mar-12
Sep-10
Mar-11
Mar-10
Sep-09
Mar-09
Sep-08
Sep-07
Mar-08
07-Oct-14
01-Jul-14
25-Mar-14
17-Dec-13
10-Sep-13
04-Jun-13
Source: Bloomberg
Inflation & Growth Drivers
Inflationary pressures abated in August, according to
headline inflation. Consumer prices – RBI’s preferred gauge
– rose 7.8% during the year to August 2014, below the
7.96% in July, and close to recent lows. Wholesale prices
expanded by 3.74%, the slowest pace since October, 2009.
Headline Inflation
Indian Inflation: WPI vs CPI
%ge YOY
18
16
WPI
New CPI
14
Industrial
Workers CPI
12
10
8
6
4
2
Aug-14
Feb-14
Aug-13
Feb-13
Aug-12
0
-2
Feb-12
Further it indicated that the 8% target is likely to be
achieved, with a downward bias (i.e. likely to be below 8%).
However, there were upside risks to meeting the 6% 2016
target, albeit a bit less so than in the previous monetary
policy statement.
7
Aug-11
As per our and the market projections, the RBI maintained
the policy rate at 8%. It restated its commitment to a
disinflationary path, wherein growth in the Consumer price
index falls to 8% by January 2015, and further to 6% by
January 2016.
8
Feb-11
The CRR (Cash Reserve Ratio) and SLR (Statutory
Liquidity Ratio) were held at 4%, 22%, respectively.
9
Aug-10

Provide liquidity through overnight and term
repos, the latter consisting of 7-day and 14-day
duration
10
Feb-10

1 Year OIS Rate
11
26-Feb-13
Maintained the Reverse Repo rate at 7%, and the
MSF (Marginal Standing facility) rate at 9%;
1-Year Interest Rate Swap
Aug-09

As the decision was in line with market expectations, 1-Year
interest rate swaps (derivate contracts to guard against 1
year borrowings) remained stable post announcement and
haven’t altered much since then.
20-Nov-12
Maintained the policy Repo rate unchanged at 8%;
Source: DX/RBI
Feb-09

0
Aug-08
At its meeting on the 30th of September, the RBI made the
following Monetary Policy decisions:
2
14-Aug-12
RBI’s Decision
MSF
Repo
Reverse Repo
Feb-08

4
Feb-07

6
Aug-07

8
Sep-06

10
Mar-07

Policy Rates: Repo, Reverse Repo & MSF
12
08-May-12

The RBI held the policy Repo rate at 8% in its latest
meeting – as broadly anticipated.
The focus on meeting the 6% headline CPI outcome
in January 2016 was reiterated.
The RBI adopted a number of measures, including
allowing banks to access additional liquidity,
provided they meet their 22% SLR holding
requirements.
Core CPI inflation has declined markedly since
September last year. However, high Food price
inflation due to the drought has limited the decline
in Headline CPI.
Inflation expectations remain high, and have edged
higher this quarter, limiting any prospect for a rate
cut.
India continues to remain an attractive investment
destination, particularly for Foreign Debt investors.
The recent upgrade in India’s outlook from negative
to stable by S&P will help improve India’s risk
perception.
We forecast the RBI to remain on hold at 8% during
the remainder of 2014 and 2015. A 25bp rate cut is
anticipated to bring the Repo rate down to 7.75% in
the March quarter, 2016.
Aug-06

RBI Decision
%ge
Summary & Overview
October 2014
31-Jan-12
by Group Economics
Source:CEIC
National Australia Bank – Group Economics | 1
India Monetary Policy
9 October 2014
Some of the factors underpinning weaker price pressures
include: easing in fuel prices, as well as relative stability in
exchange rates, limiting the impact of imported inflation.
The benchmark WTI (West Texas Indicator) price was
trading around USD90/bl. Further, 3-mth implied FX
volatility, a measure of exchange rate swings used to price
options, was at 7.4%, close to recent lows – according to
Bloomberg data.
September 2013 to a low of 6.9% in August 2014. Within
the components of Core CPI, the contribution of housing
has eased, reflecting softer rental growth. Lower global fuel
prices have lessened the impact of transport costs.
Clothing, medical and health have broadly remained stable.
There has also been an easing in household requisites,
although ‘others’, reflecting personal non-tradeable
services, has recorded strong price growth.
Core Inflation Indicators
Crude Oil Prices
% G E YOY
Core Inflation in India: CPI vs WPI
9.00
US$/bbl
8.00
135
Tapis
90
120
7.00
80
105
Brent
WTI
90
CPI
WPI
6.00
70
5.00
60
4.00
50
40
US$/bbl
30
10
2.00
1.00
Dec-12
0.00
0
0
-15
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
-10
Sep-14
Jun-14
Aug-14
20
15
Apr-14
30
3.00
Dec-13
Brent - WTI price differential
45
Aug-13
60
Apr-13
75
Source: NAB Economics
Contribution to Core CPI Inflation
Exchange rate volatility
Core CPI Contribution
10.00
Housing
Medic, Edu & Rec
Personal, House &Other
3-Month Implied FX Volatility
22
22
18
18
14
14
10
10
Clothing
Trans&Comm
Core CPI
6.00
%ge YOY
%ge
8.00
4.00
6
6
2
2
07-Oct-14
12-Aug-14
17-Jun-14
22-Apr-14
25-Feb-14
31-Dec-13
05-Nov-13
10-Sep-13
16-Jul-13
21-M
ay-13
26-M
ar-13
2.00
0.00
Source: Bloomberg
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Source: NAB Economics/RBI
Food prices, which comprise close to 50% of the CPI basket,
expanded by 9.2% over the year to August, well above the
overall CPI increase. Within food, fruits (24.3%) and
vegetable (15.2%) prices increased rapidly, suggesting
measures to improve storage, distribution and limit waste
could assist in assuaging food price pressures. Besides, the
weaker monsoon is likely to have contributed to rising food
prices. According to the Indian Meteorological Department
(IMD) the monsoon deficiency is estimated at 12%, and is
most pronounced in North West India in states such as
Punjab, UP and Rajasthan.
Household inflation expectations for the year ahead reveal
that households are expecting the retail inflation rate at
16% over the year to September, 2015. This is higher than
the previous survey, and may reflect the impact of higher
food prices due to the weaker monsoon. The survey
measures expectations of urban households based on their
individual consumption baskets and provides useful
directional information as to the likely path of future
inflation. These results will make a cut very difficult to
justify.
Monsoon Outcomes
Inflation Expectations Survey
Rainfall Deficiency
Household Inflation Expectations: 1-Year ahead
18
Nation
-12
16
14
-7
South
%ge
12
Central
-9
10
North West
-21
8
6
East & N East
-12
Source: IMD
%ge
The RBI was visibly pleased with the improvement in Core
CPI (CPI excluding food and fuel). It has fallen 160bp since
Sep-14
Mar-14
Sep-13
Mar-13
Sep-12
Mar-12
0
Sep-11
-5
Mar-11
-10
Sep-10
-15
Mar-10
-20
Sep-09
4
-25
Source: RBI
Following the robust 5.7% GDP outcome in the June
quarter, economic conditions have moderated somewhat.
National Australia Bank – Group Economics | 2
India Monetary Policy
9 October 2014
appreciated by 3.1% and 1.8% against the Japanese Yen
and Euro, respectively. Further, the INR has fared somewhat
better when compared to the basket of Emerging market
Currencies, based on the JP Morgan EM Currencies Index.
Indian Rupee to the USD
On a somewhat more positive note, the performance of the
Infrastructure sector improved strongly in August, rising by
6.9%, well above the 2.6% outcome in July. This raises hope
of an improvement in Industrial production in August. By
sector, steel, cement, electricity and coal were better
performing. The performance of the coal sector could
slacken though, given ongoing uncertainty regarding the
Supreme Court’s decision to cancel all but 4 captive
coalfields allocated since 1993.
INR/USD
30
30
35
35
40
40
45
45
Depreciation
50
70
75
75
08-Oct-14
23-Dec-13
01-Aug-13
13-Mar-13
23-Oct-12
10-Jan-12
16-May-14
65
70
04-Jun-12
60
65
17-Aug-11
55
60
28-Mar-11
Industrial Production
50
55
08-Nov-10
Industrial production has eased to 0.5% in July, from 3.9%
in June – partly impacted by a high base in July, 2013. By
sector, manufacturing, moved into negative territory, whilst
electricity was the strongest, in line with recent trends. By
use, the consumer sector was the weakest, and the volatile
capital goods category also turned negative.
Source: Bloomberg
Industrial Production: Sectoral
JP Morgan Emerging Currencies Index
20
15
JP Morgan EM Currencies Index
120.0
10
Index
%ge YOY
110.0
5
0
100.0
-5
90.0
-10
IP
Mining
Mfg
Electricity
06-Oct-14
16-May-14
27-Dec-13
09-Aug-13
22-Mar-13
02-Nov-12
15-Jun-12
09-Sep-11
19-Apr-11
24-Nov-10
Jul-14
Jan-14
Jul-13
Jan-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jul-09
Jan-09
Jul-08
27-Jan-12
80.0
-15
Source: CEIC
Source: Bloomberg
Infrastructure Industries
India continues to remain a popular investment destination
for Foreign Portfolio investors. This is particularly the case
for Foreign debt investors, who are likely to be attracted to
the inflation-fighting objective of India’s Central Bank.
Further, recent measures on extended settlement times will
add to the appeal of Indian debt securities. Interest in
India’s Equity offerings still remains, but the data for
August, September are considerably less bullish.
Infrastructure Industries: Annual Growth
20.00
Aug-14
Jul-14
Aug-13
10.00
%ge YOY
0.00
-10.00
FII Inflows
-20.00
FII Flows: Net Debt & Net Equity
400,000
Net Equity
Electricity
Cement
Steel
Fertilizers
External and Financial
Net Debt
300,000
200,000
100,000
INR Millions
Source: CEIC
Refinery Products
Natural Gas
Crude
Coal
Infrastructure
-30.00
0
-100,000
-200,000
It should be remembered that the recent Dollar strength
has been broad based, against a number of other
currencies, not just the Indian Rupee. According to data
st
from the RBI, over the month to 1 October, 2014, the
Indian Rupee depreciated by 2.1% against the USD, but
Sep-14
Mar-14
Sep-13
Mar-13
Sep-12
Mar-12
Sep-11
Mar-11
Sep-10
Mar-10
Sep-09
-400,000
Mar-09
-300,000
Sep-08
The Indian Rupee has pared back some of its recent
weakness against the greenback, buoyed by a narrowing in
Augusts’ trade deficit (USD 10.8bn vs. USD12.2bn in July),
lower Crude oil prices and Dollar selling by nationalised
banks. It was last trading around 61.39/USD, compared
nd
with a recent low of 61.82/USD on the 2 of October.
Source: DX
Ratings agency, S&P recently upgraded its outlook on India
from negative to stable. It highlighted that the current
political landscape is more amenable to economic and fiscal
reforms. The decision by S&P will further improve India’s
standing. There has been a continued, gradual easing in
the State Bank of India’s CDS spreads, a proxy for India’s
National Australia Bank – Group Economics | 3
India Monetary Policy
9 October 2014
Sovereign risk. This pattern in CDS spreads is aligned with
the improved S&P rating.
Further, more liberal measures were adopted
regarding short selling Government securities.

Boosting Banks’ Liquidity: To provide flexibility to
banks in meeting the Basel 3 LCR (Liquidity
Coverage ratio) mandate, Banks which meet their
22% SLR requirement can now access a further 5%
liquidity of their Net Demand and Time Liabilities
(NDTL) from the RBI at a rate higher than the MSF
rate. This is in addition to 2% (of NDTL) that Banks
can access through the MSF facility.

Early Warning System: To provide forewarning of
potential banking problems, banks’ critical
financial metrics are to be closely monitored by the
RBI. Deviations from pre-defined benchmarks could
result in more invasive supervision.
Outlook

With regard to the Monetary policy outlook, we are
forecasting the RBI (Reserve Bank of India) to remain on
hold for an extended period. The Repo rate is forecast to
remain at 8% for the remainder of 2014 and 2015,
before the RBI cuts by 25bp, leaving the Repo rate at
7.75% by March quarter, 2016.
Central Fraud Registry: To assist banks by
providing a central database of fraudulent
customer.

Foreign Investors: To address operational issues
faced by Foreign Portfolio investors in different
time zones, an option for T+2 settlements for
secondary market OTC trade in Government
securities.

Hedging for Importers: Importers can now hedge
up to 100% of imports (previously 50%) based on
the higher of the past 3 years or the previous year
imports, subject to other conditions being met.
Sovereign Risk Perception
150
100
100
50
01-Oct-14
200
150
05-Mar-14
250
200
07-Aug-13
300
250
09-Jan-13
350
300
13-Jun-12
400
350
16-Nov-11
450
400
20-Apr-11
500
450
22-Sep-10
Basis points
State Bank of India: CDS Spreads
500
50
Source: DataStream
th
In its Monetary Policy report issued on the 30 of
September, the RBI indicated that it expected to meet the
critical 6% medium term target, although the latter faced
upside risks. Some of the risks stem from RBI’s internal
modelling on the path of Headline CPI, which indicated a
7% outcome in March quarter, 2016. It reconciled these
diverging trends by suggesting that their judgement
reflected a 6% outcome, but the model results indicate
upside risks to the forecasts.
An improvement in the food supply chain would be the
main factor ensuring a lower path for prices going forward.
Weaker commodity prices would also help. Conversely, a
weaker exchange rate, higher commodity prices, a sub-par
monsoon in 2015-16 and stronger than expected growth
could generate upside risks to inflation. The evolution of
these factors, and the attendant inflationary impact will
likely influence the RBI’s decision going forward.
John Sharma
Economist – Sovereign Risk
[email protected]
Tom Taylor
Head of International Economics
[email protected]
RBI’s Other Measures
The RBI mentioned it would reduce the liquidity provided
under the Export Refinance facility (ECR) from 32% to 15%
to reduce dependence on sector-specific liquidity measures.
Instead, it wanted to focus on providing liquidity across the
board through both overnight Repos (0.25% of Net Demand
and Time Liabilities) as well as term Repos of 7-day and 14day duration (0.75% of Net Demand and Time Liabilities).
Additionally, the RBI highlighted a number of measures to
improve India’s banking and financial architecture. They
include:

Developing Government Securities market: As
part of measures to improve the Government
securities market, the ceiling on SLR securities in
the Held to Maturity category (i.e. without marking
to market) is to be reduced from 24% to 22% in a
staggered manner, over January-September, 2015.
National Australia Bank – Group Economics | 4
India Monetary Policy
9 October 2014
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National Australia Bank – Group Economics | 5