On 30th October 2012 the day the Reserve Bank (RBI) was to announce its mid quarter monetary policy review there were expectations that the RBI would announce a rate cut which to some extent was also endorsed by the Finance Minister.
However the RBI’s review reiterated its view that price stability is the overriding objective of monetary policy and the key to achieving broader economic stability.
Given retail price inflation hovering near double-digit levels and India’s fiscal and current account deficits high, RBI decided to keep the repo rate unchanged at eight% but cut CRR by 25 basis points to 4.25%. The cut in CRR (expected to release Rs. 17,500 crore of primary liquidity into the banking system) is expected to support the high demand for funds associated with the busy and festive season.
Factoring in the increasing stress on investment and growth, the RBI has scaled down its GDP growth projection for 2012-13 from 6.5% to 5.8%, and lowered its indicative target for non-food credit growth from 17% to 16%. It has also lowered the M3 growth target from 15% to 14%, and the deposit growth target from 16% to 15%, owing to the persisting inflation and the overall economic slowdown. While the RBI expects inflation to ease in the fourth quarter, the underlying pressures from an accommodative fiscal policy and the correction in administered prices of fuel components have prompted it to revise its inflation projection to 7.5% by March 2013, compared with the earlier 7%.
The decision of the RBI has not gone down well with the Centre as it hoped that its continued effort to consolidate the fiscal position would prompt the RBI to announce a rate cut and thus spur investment.
However, the RBI Governor is of the view that the government and RBI have common goals and concerns. Both want high and stable growth, and low and stable inflation. As both the government and the RBI have their respective responsibilities. It is a question of timing and RBI thinks that the government should understand its concerns. ‘We understand the government’s compulsions. Sometimes, the coordination is more visible, sometimes it isn’t. There will always be disagreements on certain issues but we need to settle those internally’ says the Governor.
The Governor further adds that ‘It’s certainly reassuring that the finance minister has indicated the fiscal trajectory not only for 2012-13 but also for the medium term. He laid focus on expenditure compression, and expects to realise telecom revenues and disinvestment proceeds in full. Of course, there is a lot of detail into it. We all know and understand how difficult it is to cut expenditure, especially in the short term. There is also concern on tax revenues—whether these would be realised according to the Budget estimate.
Possibly, if global commodity prices soften and if the rupee appreciates, there would get some comfort. There is an output gap now. If there is a supply response, that would also reduce pressure on inflation. Also, there is a base effect. So, with the factors from the real world and the statistical world, RBI expects inflation to soften in the fourth quarter, though it is difficult to say precisely when.
The stock markets were disappointed with the action of the Reserve Bank and many rate sensitive stocks were beaten down. However, the stock markets have now discounted the action of the Reserve Bank and are now poised to start discounting a rate cut in the fourth quarters which appears likely now.
In the light of these developments investors could start looking at rate sensitive stocks especially in the Realty and Infra sector which have been beaten out of shape. Of course there are not many quality stocks in these sectors and therefore selection poses a problem.
Ideally in the realty sector a stock like DLF which has been beaten down from Rs. 250 levels to around Rs. 200 levels mainly due to issues other than fundamental could be considered for investment as once the dust settles down the stock could gradually climb up its earlier level of Rs. 250 and thus generating a decent return.
Similarly in the infra sector IRB infra has been beaten down from Rs. 150 to around Rs. 115 levels on allegations of the company’s links with the president of the BJP and that the company has lent funds to certain companies of the BJP President in lieu of certain favours. However at the current levels the valuations appear attractive and in this case too once the dust settles down the stock could once again climb up to its earlier level of Rs. 150.
The banking and the auto sector are the other sectors which merit a consideration for investment at current valuations.
The stock markets have now discounted the action of the Reserve Bank and are now poised to start discounting a rate cut in the fourth quarters which appears likely now.
In the light of these developments investors could start looking at rate sensitive stocks especially in the Realty and Infra sector which have been beaten out of shape.