Banking -Mid-quarter review of Monetary Policy 2010-11:: Emkay

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Banking

Mid-quarter review of Monetary Policy 2010-11

n     RBI in its mid quarter policy review announced a permanent cut of 100bps in SLR to 24% wef Dec 18, and purchase of g-secs worth Rs480bn through OMO over the next one month

n     SLR cut to result in 3bps improvement in banks’ margins, while OMO to infuse liquidity into the system easing short term interest rates

n     RBI kept other key policy rate unchanged with Repo at 6.25%, Reverse repo at 5.25% and CRR at 6.0%

n     Though rate hike on pause for now, inflationary pressures from domestic demand and higher global commodity prices to continue to guide the policy actions

SLR cut – Positive for banks’ margins

RBI in its mid quarter monetary policy review announced a 100bps cut in SLR to 24%.

In its earlier measures the RBI has allowed banks to avail of additional liquidity support

under the LAF to the extent of up to 2.0% of their NDTL till January 28, 2011. While the

earlier measures were temporarily, today’s action is permanent in nature as it will inject

liquidity on sustainable basis of the order of 480bn. Moreover, this will have positive

impact on bank’s margins as they now will be able to deploy that 1% of NDTL in higher

yielding advances which earlier they were putting in G-sec where the yield were lower at

around 6-8%. Consequently, this will result in ~3bps improvement in bank’s margins.

OMO auction….to ease liquidity and hence short term rates

RBI announced to conduct Open Market Operation (OMO) auctions for purchase of

government securities for an aggregate amount of Rs480bn over next one month.

(Rs120bn per week starting 24th December, 2010). This measure of RBI will ease

liquidity situation considerably. The liquidity in the system has been tight for quite some

time as net LAF repo amount since November has been on an average in excess of

Rs1.0tn. The tightness in liquidity has been on account of several factors like lower

government spending, advance tax outflow, and flurry of IPO’s during the period. As a

result of this, the short term interest rates has moved up sharply over the last few

months with call money rates remaining consistently above repo rate. However we

believe that, with the Rs480bn flowing back into the system, the liquidity situation will

ease considerably resulting in loosening of short term interest rates.

Inflation continues to remain key addressable

The RBI continued to remain concerned as inflation is significantly above its comfort

level. As the RBI quotes ‘rising domestic input costs for the manufacturing sector

combined with aggregate demand pressures could weigh on domestic inflation. The risk

to the Reserve Bank’s projection of 5.5% inflation by March 2011 is on the upside.’