[T.S.R:17352] India: Oil Price Is A Consumption Tax, This Will Automatically Slow Growth

Why does DV Subba Rao carry that look of being lost in a wilderness?

For one he cannot fight crude price with interest rates. Yet the significance of rising fuel costs, inflation and interest rates should be no less than severe assault on the consumption of the masses. That is why, we are wary, very wary of the Equities markets in India. The head trio of higher mortgage payments, lower disposable income due to crude and inflation will stifle growth. The GOI does not have to do anything more. And equities will keep sliding.

The RBI hiked the repo rate by 50bps last week, to curb demand side pressures and anchor inflationary expectations. Core inflation has already peaked at 7% in Mar '11 in our view; however, fuel inflation would drive inflation up in coming months. We expect rate hikes of 50bps in remaining-FY12e.

n       Policy highlights. RBI increased the repo rate (at which banks borrow from RBI) by 50bps to 7.25%; this is the 9th consecutive hike since Feb '10. It has also increased the savings bank deposits rate by 50bps to 4%. Cash reserve ratio (CRR) remains at 6%.

n       Key announcements. Following the global standard, the RBI has decided to keep repo rate as the single, independent varying policy rate henceforth. The reverse repo rate has been pegged at a fixed 100bps below the repo rate. Also, RBI has introduced a marginal standing facility (MSF) from which SCBs can borrow up to 1% of their respective net demand & time liabilities (NDTL) overnight. Interest rate on MSF has been pegged 100bps above the repo rate.

n       Banks' savings account deposits rate hike impact limited. Impact of the saving account rate hike on banks' margins is negative, but unlikely to be major. If banks do not increase base rates hereon, our sensitivity analysis indicates that the impact of the increase in savings account deposits rate on margins is limited to 6-14bps.

n       Higher provisions for sub-standard and restructured loans. RBI has proposed that banks make higher specific provisions on sub-standard and restructured loans, for which detailed guidelines are awaited. While this move would impact banks' short-term profit growth, especially banks with higher share of restructured loans, it would strengthen the banking system in the long term.

n       Outlook. The core inflation jumped to 7% in Mar '11, considerably above the RBI's 4% target. We expect this has already peaked. However, a major threat to inflation comes from elevated crude oil prices. As assembly elections in five states are almost over, the government is expected to announce diesel and petrol price hikes. Factoring these, we expect inflation to be in the 6-8% range in FY12e. On the growth front, the RBI is concerned about investment slowdown as banks would raise lending rates. Hence, we do not expect the RBI to increase the repo rate more than 50bps in remaining-FY12e.
 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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