Indian Monetary Policy Updates for Dec 2011

1. RBI kept CRR ratio and repo rate unchanged at 6.0% and 8.5%
2. Inflation (Nov WPI) declined from 9.73% to 9.11% in Oct but is way above RBI's year end target of 7%
3. RBI's credit growth target remain unchanged at 18%

RBI's Outlook
Due to high downside risks to growth and already moderating growth momentum further rate hikes may not be warranted. Hereon, monetary policy actions will respond to risk to growth

Risk to Growth
1. IIP growth turned negative from 2% in Sep to -5.1% in October 2011. Index of IIP was at 158.1 in October.
2. Manufacturing sector constitutes over 75% of IIP Index. Due to high interest rate and moderating demand scenario owing to high inflation, Manufacturing sector registered -6.0% growth in October.
3. Mining sector also registered de-growth by 5% due to current crackdown in mining sector. Lack of policy clarity and environmental clearances has impacted this sector
4. IIP Index was at 175.6 in Dec 2010 and at 193.1 in Mar 2011. Even though growth registered in 8 core sectors in Nov 2011 will show growth in IIP index in Nov 2011 but due to high base effect YoY numbers may look bad in Dec '11 to Jan '12 and we may even see contraction there.

Due to above substantial turnaround can be expected only in first quarter next year

10 Year G-Sec Yields

Before policy 10 yr G-sec yield which was around 8.5% corrected to 8.37%. This is positive for banks as no further provisioning will be required on AFS portfolio in Dec quarter