Thursday, November 26, 2009

CITI Research Reports

Affected by monsoons, 2009 is declared an all-India drought year, and agriculture growth probably fell by about 4%. However, unlike past droughts, the impact will be muted due to (1) on-going stimulus measures via the national rural employment guarantee act, the farm waiver and the pay revision and (2) the impact of new hydro-carbon discoveries.

We believe that similar to FY08, the RBI could once again be caught in the trap of the impossible trinity. In response to rising flows, we expect (1) the initial goal would be to re-build reserves that were run down during FY09, (2) some INR appreciation to offset inflationary pressures, and (3) although we do not expect that India will impose punitive controls, one could see a reversal of some measures taken last year. This could include tightening ECB and banking capital norms, reducing interest rates on NRI Deposits, and encouraging capital outflows.

Rising inflation will prompt central banks to hike ahead of the Fed, but tightening will be gradual for fear of threatening growth and catalyzing unwelcome capital inflows. While loan growth remains anaemic, better-than-expected IIP data and rising WPI will likely prompt tightening by early 2010.

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