2019 EQUITY SPECIAL REPORT
JUNE 2019 RBI MONETARY POLICY CAPITALSTARS
CapitalStars Financial Research Pvt., Ltd., SEBI Registration Number: INA000001647
Monetary Policy The monetary policy is a tool with which the Reserve Bank of India (RBI) controls the money supply by controlling the interest rates. They do this by tweaking the interest rates. RBI is India’s central bank. World over every country’s central bank is responsible for setting the interest rates. While setting the interest rates the RBI has to strike a balance between growth and inflation. In a nutshell – if the interest rates are high that means the borrowing rates are high (particularly for corporations). If corporate can’t borrow easily they cannot grow. If corporations don’t grow, the economy slows down. Other objectives of the monetary policy of India, as stated by RBI, are Price Stability, Controlled Expansion Of Bank Credit, Promotion of Fixed Investment, Restriction of Inventories and stocks, To Promote Efficiency, Reducing the Rigidity.
CapitalStars Financial Research Pvt., Ltd., SEBI Registration Number: INA000001647 On the other hand when the interest rates are low, borrowing becomes easier. This translates to more money in the hands of the corporations and consumers. With more money there is increased spending which means the sellers tend to increase prices leading to inflation. In order to strike a balance, the RBI has to consider all the factors and should carefully set a few key rates. Any imbalance in these rates can lead to an economic chaos. The key RBI rates that we need to track are as follows: As of 6 May 2019, the key indicators
Inflation–Inflation is a sustained increase in the general prices of goods and services. Increasing inflation erodes the purchasing power of money. All things being equal, if the cost of 1 KG of onion has increased from Rs.15 to Rs.20 then this price increase is attributed to inflation. Inflation is inevitable but a high inflation rate is not desirable as it could lead to economic uneasiness. A high level of inflation tends to send a bad signal to markets. Governments work towards cutting down the inflation to a manageable level. Inflation is generally measured using an index. If the index is going up by certain percentage points then it indicates rising inflation, likewise index falling indicates inflation cooling off. Cash Reserve Ratio– Every bank is mandatorily required to maintain funds with RBI. The amount that they maintain is dependent on the CRR. If CRR increases then more money is removed from the system, which is again not good for the economy. Statutory Liquidity Ratio–Every financial institution has to maintain a certain quantity of liquid assets with themselves at any point of time of their total time and demand liabilities. These assets have to be kept in non-cash form such as G-secs precious metals, approved securities like bonds etc. The ratio of the liquid assets to time and demand liabilities is termed as the statutory liquidity ratio. Repo Rate – Whenever banks want to borrow money they can borrow from the RBI. The rate at which RBI lends money to other banks is called the repo rate. If repo rate is high that means the cost of borrowing is high, leading to a slow growth in the economy. Currently, the repo rate in India is 8%. Markets don’t like the RBI increasing the repo rates.
CapitalStars Financial Research Pvt., Ltd., SEBI Registration Number: INA000001647 Reverse Repo Rate – Reverse Repo rate is the rate at which RBI borrows money from banks. When banks lend money to RBI they are certain that RBI will not default, and hence they are happier to lend their money to RBI as opposed to a corporate. However when banks choose to lend money to the RBI instead of the corporate entity, the supply of money in the banking system reduces. An increase in reverse repo rate is not great for the economy as it tightens the supply of money. The reverse repo rate is currently at 7%. The RBI meets every two months to review the rates. This is a key event that the market watches out for. The first to react to rate decisions would be interest rate sensitive stocks across various sectors such as – banks, automobile, housing finance, real estate, metals etc.
There are two types of inflation indices –Wholesale Price Index (WPI) and Consumer Price Index (CPI). Wholesale Price Index (WPI) – The WPI indicates the movement in prices at the wholesale level. It captures the price increase or decrease when they are sold between organizations as opposed to actual consumers. WPI is an easy and convenient method to calculate inflation. However the inflation measured here is at an institutional level and does not necessarily capture the inflation experienced by the consumer.
Consumer Price Index (CPI)– The CPI on the other hand captures the effect of the change in prices at a retail level. As a consumer, CPI inflation is what really matters. The calculation of CPI is quite detailed as it involves classifying consumption into various categories and sub categories across urban and rural regions. Each of these categories is made into an index. This means the final CPI index is a composition of several internal indices.
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Rate cut expected from RBI. How it could impact Financial Market? It is widely being expected that the committee will recommend another rate cut of 25-50 bps The expectation of a rate cut is based on a lower inflation rate as well as slower growth in the economy.
RBI Policy Meet All eyes will be on the Reserve Bank of India Monetary Policy Committee meet on June 6 which will set tone for the Indian equities. Given the slowing GDP growth along with the falling yields and rising bond prices, market analysts are hopes that there could be another rate cut announcement by the RBI governor Shaktikanta Das. In calendar year 2019, the RBI lowered repo rate by 25 basis points in its February and April monetary policy reviews. The market is anticipating a 25 basis points cut in repo rate to 5.75 per cent by the RBI in its second bi-monthly monetary policy for the current fiscal, which comes on the heels of the conclusion of the Lok Sabha elections 2019.
RBI repo rate Monetary Policy Committee The Monetary Policy Committee of the Reserve Bank of India is currently having its second meeting for the fiscal year 2019-20 and the monetary policy announcement will happen today. It is widely being expected that the committee will recommend another rate cut of 25 bps. In April too, the RBI had cut its repo rate by 25 bps to bring it down to 6.00% from 6.25% earlier. The expectation of a rate cut is based on a lower inflation rate as well as slower growth in the economy. The consumer price index-based inflation has remained within the RBI’s 4% target for over 6 months and
CapitalStars Financial Research Pvt., Ltd., SEBI Registration Number: INA000001647 is further expected to remain within the target range at least for the next few months. “In addition, subdued domestic economic growth could also prompt the RBI to lower its interest rates," Care Ratings said in a recent report. Consequently, the Indian economy is expected to witness a stable to lower interest rate cycle. “Looking ahead, global and local factors will guide future policy action. Consumption has slowed down a bit and the investment cycle is still slow. So a softer interest rate regime will help in boosting both. It is likely that there could be another 25 bps rate cut later in the year but that would be dependent on inflation and growth data. In addition, the central bank will keep an eye on the post-elections budget, monsoons and oil prices."
Repo rate likely to be cut! As a retail consumer, a falling rate impacts you in two different ways. If you are a depositor, the new deposits you make earn a lower rate and it means lower returns. However, as a borrower, a downward revision of interest rate would bring down your interest outgo in the near future. For instance, for floating rate home loans, a new rate becomes effective on your reset date. So, if someone has a home loan based on 1-year MCLR and reset date in January, she would see an impact in her interest rates only in January next year, Even if there is an immediate reduction in MCLR, although marginal, by the respective bank in response to the repo rate reduction.
Reverse Repo Rate
The transmission of the rates from banks to borrowers would be different across banks. Though any reduction in rate helps you as a borrower of big-ticket loans like home loans, you should not hurry
CapitalStars Financial Research Pvt., Ltd., SEBI Registration Number: INA000001647 towards switching a loan to another lender for a difference less than 50 bps, as it does not make a meaningful impact over the tenure of the loan.
Meanwhile, the Indian economy is doing well and it is expected that it would expand at an annual rate of more than 7 per cent every quarter over next two years. Investors looking for good long-term investment opportunities may consider going long amid the ongoing market disruptions. But one must do rigorous homework on quality stocks before buying them. The long-term outlook of the Indian economy is pretty good and it is expected that India will continue to remain the world's fastest growing major economy.
CapitalStars Financial Research Pvt., Ltd., SEBI Registration Number: INA000001647
Capital Stars Investment advises details: NAME OF THE STOCK: HDFC SEGMENT: CASH CHART TYPE: Candlestick EXCHANGE: NSE
TECHNICAL INDICATORS USED: VOLUME.MACD, RSI. CHART
INVESTMENT ADVICE:
CS CALL:- BUY HDFC IN CASH ABOVE 2225 TGT 2325 SL 2170
RATIONALE FOR ARRIVING INVESTMENT ADVICE : TECHNICAL VIEW : THE STOCK TECHINCALLY IS UP ,TAKING SUPPORT OF VOLUME.RESISTANCE IS BROKEN TODAY WITH HEAVY VOLUME.AS WELL AS A POSSIBILITY OF UPWARD MOVEMENT IS THERE.SHOWING STRENGTHS IN INTRADAY CHARTS AS WELL. OTHER REASON IF ANY :- A POLICY RATE CUT BY RBI IS GENERALLY EXPECTED TO BRING DOWN THE INTEREST RATES FOR HOME LOANS, AUTO LOANS AND PERSONAL LOANS AMONG OTHER THINGS, CONSIDERED CRUCIAL FOR BOOSTING THE CONSUMPTION. IT IS EXPECTED THAT BANKS WILL LOWER THE INTEREST RATE AND SPUR THE ECONOMY.EXPECTATION FROM RBI IS TO HAVE RATE CUT BY 25 BPS.THIS WOULD REDUCE THE BURDEN OF PAYING HIGHER HOUSING LOAN EMI’S TO SOME EXTENT.LOAN BOOK OF THE COMPANY IS ALSO EXPECTED TO IMPROVE WITH THE DECISION.
CapitalStars Financial Research Pvt., Ltd., SEBI Registration Number: INA000001647
Capital Stars Investment advises details: NAME OF THE STOCK: HEROMOTOCO SEGMENT: CASH CHART TYPE: Candlestick EXCHANGE: NSE
TECHNICAL INDICATORS USED: VOLUME.MACD,RSI. CHART
INVESTMENT ADVICE:
CS CALL:- BUY HEROMOTOCOIN CASH ABOVE 2755 TGT 2900 SL 2650
RATIONALE FOR ARRIVING INVESTMENT ADVICE : TECHNICAL VIEW : THE STOCK TECHINCALLY IS UP ,TAKING SUPPORT OF VOLUME.RESISTANCE IS BROKEN TODAY WITH HEAVY VOLUME.AS WELL AS A POSSIBILITY OF UPWARD MOVEMENT IS THERE.SHOWING STRENGTHS IN INTRADAY CHARTS AS WELL. OTHER REASON IF ANY :- A POLICY RATE CUT BY RBI IS GENERALLY EXPECTED TO BRING DOWN THE INTEREST RATES FOR HOME LOANS, AUTO LOANS AND PERSONAL LOANS AMONG OTHER THINGS, CONSIDERED CRUCIAL FOR BOOSTING THE CONSUMPTION. IT IS EXPECTED THAT BANKS WILL LOWER THE INTEREST RATE AND SPUR THE ECONOMY.EXPECTATION FROM RBI IS TO HAVE RATE CUT BY 25 BPS.THIS WOULD REDUCE THE BURDEN OF PAYING HIGHER HOUSING LOAN EMI’S TO SOME EXTENT.LOAN BOOK OF THE COMPANY IS ALSO EXPECTED TO IMPROVE WITH THE DECISION.
CapitalStars Financial Research Pvt., Ltd., SEBI Registration Number: INA000001647
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