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Interest rates and outlook

 

In its monetary policy review for FY 13-14, the RBI reduced the repo rate by 25 bps. We believe that the average inflation and growth

for 2014 will be lower than RBI's prediction of 5.5% and 5.7% respectively. This to our understanding will likely give RBI room to take

further steps towards monetary easing. We have seen demand side moderation in last 6 months and if that continues then trade deficit

will likely moderate further by about 20% for FY 2013-14 against FY 2012-13 number of 193 billion dollars. This may also result in

lowering of CAD for FY 2013-14 to be around 4.5% to 4.7%.

Credit quality constraints on Corporate India bottoming out

Credit quality constraints on corporate India appears to be bottoming out with the credit ratio (ratio of upgrades to downgrades) at 0.62 times in the second half of 2012-13. A slowdown in demand, and liquidity constraints were primary reasons for weak credit quality in FY2013. Though credit quality saw a significant decline in 2012-13 from the previous year, the pace of decline in credit quality moderated during the last six months of 2012-13.

This clearly reflected in the marginal decline in credit ratio to 0.62 times during H2 2012-13 from 0.66 times in H1 2012-13, in contrast to the steep decline observed in H1 2012-13 from 0.91 times in H2 2011-12.

The credit ratio exhibits a correlation with economic indicators such as the index of industrial production (IIP) and gross domestic product (GDP). Notably, the fall in credit ratio has been accompanied by a decline in GDP in H2 2012-13.

(Source: Crisil Research)

 

Inflation

Headline inflation eased sharply to 5.96% in March 2013 from 6.84% in February 2013 in year-on-year (y-o-y) terms, tracking a broadbased

moderation in inflation of the sub-indices, particularly primary food products (to 8.7% from 11.4%) and manufactured products

(to 4.1% from 4.5%). The initial inflation print for March 2013 is below market expectations, as well as the baseline projection of 6.8%

made by the Reserve Bank of India (RBI) in January 2013. Expectations of a normal monsoon and subdued commodity prices will aid

to softening trend in inflation.

(Data source: ICRA Research)

 

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