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ƒ Tight liquidity conditions to prevail for another 2-3 months
ƒMassive refinancing in the CD market, one-month rates at 9.5%
ƒ No easy policy options, stay on the sidelines until liquidity eases
ƒ To reiterate our 8 October view: time to book profit
Liquidity blues
Tight liquidity conditions expected to prevail:
1) Our discussions with
banks and other key money market players indicate that the current tight
liquidity conditions will likely hold for another 2-3 months. Credit demand
is picking up while deposit growth continues to be tardy (marginal creditdeposit analysis is highlighted later in the report).
2) The liquidity deficit is
showing up in banks’ raising 1-month deposits at 9.5% (including some
large PSU banks). Therefore, market sources are hinting at term deposit
rates inching up to the 9% range if current conditions prevail for longer.
3) Accounting for the advance tax payments this month, market players
indicate that the liquidity deficit could inch up to INR1,800b-1,900b. The
key to incremental liquidity is the government surplus with the RBI, which
is about INR950b. Government spending has been tardy and our
discussions indicate that incremental government spending directed
towards the rural sector will not ease the liquidity situation quickly enough
due to its low multiplier characteristic. 4) The short-term money market
rates are hovering around the 9.5% mark due to massive refinancing in
the CD market in the 1-3 month maturity range, especially by the PSU
banks. 5) No easy policy options for the RBI here – it is still issuing
INR50b per week in government securities (down from the INR80b-90b
range a few weeks back). Our checks reveal that even if it had refrained
from issuing additional G-secs over the past couple of months, the
liquidity deficit would not have been so bad.
Our ‘Time to book profits’ thesis is playing out: 1) Since October
(refer to our report ‘Time to book profit’ dated October 8, 2010), we have
been recommending investors book profits in Indian banks on concerns
of a widening credit-deposit gap and sky-high valuations. Our thesis on a
worsening liquidity situation is playing out and we continue to advise
remaining on the sidelines until the current illiquidity corrects itself. An
inverted yield curve is never conducive to good banking stock
performance.
Incremental credit-deposit analysis: With respect to the widely
expected system average loan growth of 20% and RBI’s deposit growth
guidance of 18%, our analysis indicates that the sector has a lot of
ground to cover. In terms of credit growth – from the beginning FY11
aggregate loan book of INR32.4t, an addition of INR6.5t is required for
20% growth. To November 5, INR2.85t had been added; leaving
INR3.65t to be added over the rest of the year, implying 25% annualized
growth. Similarly for deposits – from the beginning FY11 aggregate
deposit base of INR45t, an addition of INR8t is required for 18% growth.
To November 5, INR3.24t had been added; leaving INR4.76t to be added
over the rest of the year, implying 24% annualized growth. This indicates
that either loan growth will have to be sacrificed or deposit rates will have
to move meaningfully higher (to attract more deposits) to bridge the
current credit-deposit gap.
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