SALIENT POINTS

• Monetary Measures:

- Repo rate cut by 25 bps to 7.75%. Consequently the reverse repo and the MSF (Marginal StandingFacility) rate stand reduced to 6.75% and 8.75% respectively

- Bank rate also adjusted downwards to 8.75%

- CRR has been cut by 25 bps to 4.00%

• GDP growth: FY13 estimate revised down to 5.5% from 5.8% projected earlier. This is mainly due tosluggish external demand and sustained weakness in domestic investment activity. Expects recent reformmeasures to have an impact over the medium term and help economy recover.

• Inflation: Headline inflation, as measured by WPI, also revised down to 6.8% (from 7%) factoring inthe recent developments. However expects inflation to remain range-bound in coming quarters andreiterated that tangible progress on supply constraints and fiscal consolidation can help inflationmoderate on a sustained basis.

• Money Supply and Credit Growth: M3 projections cut to 13% (from 14%), while non-food creditgrowth projections retained at 16%.

Source: RBI

The policy outcome was along expected linesreflecting the RBI’s efforts to boost growth – repo, CRRand SLR have been cut by 75 bps, 75 bps and 100 bps respectively over the last one year. Themoderation in headline inflation alongwith the recent measures by the government to address fiscaldeficit, seemed to have provided the central bank adequate comfort. It has indicated that the overallweak growth environment needs to change - investment activity remains lackluster, fallingconsumption demand and anemic export demand. RBI acknowledged the need to address thisworrisome trifecta and indicated that inflation pressures could be manageable.

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Market Insight

RBI’S THIRD QUARTER REVIEW OF ANNUAL POLICY (FY13) - A PERSPECTIVE

JANUARY 2013

3.25

4.75

5.00

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Reverse repo rate Repo rate CRR(%)

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At the same time, it has highlighted various downside risks stemming from the widening twindeficits (current account and fiscal), potential spillover of global risks (given India’s rising capitallinkages) and risk aversion in the banking system due to credit quality concerns. While Indiahas been witnessing strong FII flows, FDI flows have been quite low. The recent increase in FIIinvestment limits in government and corporate debt should help in getting new flows as well asdeepen the local bond market.

The CRR cut is a pre-emptive measure to cushion the banking system from seasonal demandfor liquidity ahead of the financial year end. In recent weeks, the LAF borrowing levels haveedged lower but broadly remainedabove bank’s comfort zone. Historically, the banking systemhas witnessed a rise in liquidity pressures during the last quarter of the financial year.

MARKETS

Indian treasury bond yields were volatile and closed almost flat as the RBI’s cautious outlookstatement weighed on investor sentiment.

Latest Yesterday’s close

1-year Gilt yield 7.75% 7.79%

5-year Gilt yield 7.83% 7.87%

10-year Gilt yield 7.85% 7.86%

5-year AAA Corporate Bond Yield 8.72% 8.72%

Equity markets initially moved up but closed in the red. Banking stocks also surrendered gainsclocked earlier during the day.

Select Equity Indices (% change since yesterday’s close)

BSE Sensex -0.56%

Nifty -0.41%

S&P CNX 500 -0.49%

BSE CD -0.51%

BSE Bankex -0.51%

BSE Realty -2.07%

OUTLOOK

Global economic growth continues to remain subdued, particularly in developed economies.The high sovereign debt burden and limitations on the fiscal side have led central banks to adoptunorthodox policy measures to support growth. This was reflected in Bank of Japan’s recentmeasures - it joined the US Federal Reserve in adopting open-ended monetary easing (linked toinflation target of 2%). Central banks in Emerging markets have also maintained an easymonetary policy stance, while focusing on reining in export competitiveness.

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Source : CEIC, Deutsche Bank

Amidst this uncertain environment, RBI should maintain its growth supportive stance.However, a lot depends on the evolution of local and global risks. Inflation seems to be trendingdown due to fall in core drivers and weakness in global commodity prices. However, thegovernment needs to usher in supply side reforms to ensure that the economy is not overtlydependent on the vagaries of global commodity markets. In addition, boosting of investmentactivity remains a key component for future growth.

Source : CSO, Morgan Stanley Research, E-Morgan Stanley Research Estimate

RBI will continue to do a balancing act to manage growth and inflation expectations.Accordingly, the path to monetary easing is likely to be uneven. We expect market yields tofluctuate in a narrow range over the near term and the focus will now shift to the UnionBudget. A portfolio of fixed income funds providing a combination of high coupon incomealong with capital gains willwork well in the current environment.

21%

24%

27%

30%

33%

36%

39%

F1992 F1995 F1998 F2001 F2004 F2007 F2010 F2013E10%

12%

14%

16%

18%

20%

22%

24%

26%

28%

Total Investment, LS

Public and Private, RS

as % of GDP

-10

-5

0

5

10

15

20

25

2007 2008 2009 2010 2011 2012

WPI momentum CPI (IW) momentum3m/3m SA, %yoy

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