Monetary policy preview: GEPL Capital

GEPL Capital has come out with a report on Monetary policy preview.
Economic Indicators:

• The wholesale price index (WPI), rose 8.31 percent in the year to February, well above the RBI's comfort zone of 6.5 percent.
• Indian overnight indexed swaps (OIS) were lower on Tuesday tracking U.S. yields as well as a drop in oil prices.
• The benchmark five-year swap rate was down 6 basis points on the day at 7.84 percent, after touching a low of 7.82 percent in early deals.
• The one-year swap rate was down 6 basis points at 7.32 percent, after falling to 7.30 percent, it’s lowest since Jan. 14.
• Safe-haven U.S. Treasury yields fell on reports that the explosions at the stricken Fukushima nuclear power plant in Japan were leading to
  higher levels of radiation near Tokyo.
• Brent crude fell by as much as 1.9 percent to below $112 after explosions rocked an earthquake-stricken Japanese nuclear plant on
  Tuesday after touching a high of $118.
• The spread between the 1-year and the 5- year OIS has narrowed to 52 basis points from 66 basis points at the start of the year, bearflattening
  the OIS curve as tight cash conditions as well as rate hike expectations kept the shorter-end elevated. The market is factoring a
  higher probability of a 25 basis points rate hike and therefore the curve is flattening.

RBI Steps So Far:

• The RBI raised its main lending rate or the Repo rate by 175 bps to 6.50 percent and its main borrowing rate (Reverse Repo Rate) by 225
  bps to 5.50 percent through seven rate increases since 2010.

REPO RATE	REVERSE REPO RATE	CASH RESERVE RATIO (CRR)	SLR
6.50	5.50	6.00	24.00

• Eased SLR by 1% in the last Monetary Policy Review.
• Purchased Government Securities worth Rs.37,067.959 Crore against an amount of Rs.48,000 crore through an Open Market Operations
  (OMO) to ease liquidity in the system till December 2010.

Expectations From January Policy Review:

• The Reserve Bank of India (RBI) can hike Repo Rate by 50 bps & Reverse Repo Rate by 25 bps to contain price pressures. The
  corridor can be widen from 100bps to 125bps.
• Can revise Inflation forecast from 6.5 – 7 to 7 to 7.5 per cent by March end.

Impact:
Economy:

• The central government will not oppose this move as spiraling food and fuel prices have damaged voter confidence in the government,
  causing a headache for the multi-party ruling coalition ahead of key state elections
• Inflation (WPI) may fall to 7.50 levels by March end.

Markets:

• 25bps hike is being priced in by Bond Market / Money Market / Equity Market. If Repo Rate goes up by 50bps, the Yield will be under
  pressure and 11 Year G-Sec can climb to 8.17 level.
• Equity Market may see some sell – off, if rate goes up by 50bps.

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