RBI Monetary Policy Expectations

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With Inflation showing no signs of abatement and corporate profits on the upswing, it is high time that RBI act as an independent regulator in the interest of Indian consumer and not South Block.

In the forthcoming announcement of monetary and credit policy on July 27, markets expect 25bps hike in both repo and reverse repo rates and no change in CRR. This expectation is based on the view that as the economy inches towards normalcy, policy rates also need to firm up to their long-term ‘steady-state’ level. Any more aggressive tightening is unwarranted at this juncture in analysts

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India July rainfall ~12% below normal so far

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According to the latest update on the progress of South West monsoon 2010, all India rainfall during the monsoon season so far (between 1 June and 21 July) and during July (from 1-21 July) were ~14% and ~12% deficient, respectively, compared to their long period average (LPA).

During the monsoon season so far (June 1- July 21), actual rainfall in South peninsula has been 9% above LPA. In fact, South peninsula is the only region where the actual rainfall so far has exceeded the LPA. The actual rainfall in North West India and Central India was 12% and 19% below the LPA, respectively. Progress of rainfall

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India Reforms 2.0 – GST Closer to Rollout

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The FM has proposed to start with a differential tax structure for goods and services in the first year and gradually converge to a uniform rate structure applicable for all goods and services in the third year. He has proposed Central GST (CGST) and requested states to consider State GST (SGST) rates equivalent to the former. Likely effective rates are summarised in the table below:

Rate Structure – There will be two tier rate structure for goods and separate rate for services in initial years. It is

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Deficit Watch – fiscal improvement + red flag on the current account

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India’s current account balance has been subject historically to pronounced seasonality – improving sharply in the second half of each fiscal year (October- March). For FY09/10, however, we were surprised that the seasonal impact did not apply – instead, the current-account deficit actually widened for October 2009-March 2010 (to 3.4% of GDP, from 2.2% of GDP for April-September 2009). There were two main factors responsible; the trade balance was broadly unchanged between the two halves of the fiscal year

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Energy Sector De-regulation – India Vs China

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Deregulating petrol (gasoline) prices on 25 June is an important, bold and encouraging step for India’s fuel price reforms. We expect India to deregulate diesel prices in 2HFY11, which is critical to the sustainable growth of State-owned oil companies’ profitability. Both the Chinese and Indian governments have increased gas prices substantially in May. While the hike is mainly to offset the loss from imports of expensive gas by PetroChina, Indian gas companies, such as OIL and ONGC, can get true economic benefits from the gas hike.

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