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Mid-Quarter RBI Monetary Policy Review
RBI to inject liquidity: With the declining trend in inflation and liquidity crunch in the system,
the Reserve Bank of India (RBI) has announced pumping in `48,000cr into the system,
while keeping key policy rates unchanged. The Central Bank has maintained status quo on
the cash reserve ratio (CRR) at 6.0%, but it has reduced the statutory liquidity ratio (SLR) by
1.0% to 24.0%. The additional liquidity support under the LAF has been reduced from 2%
of NDTL against an SLR of 25% to 1% of NDTL against an SLR of 24%, thereby keeping the
effective SLR at 23% of NDTL. In addition to this, the RBI has announced open market
operation (OMO) for purchase of government securities of up to `48,000cr in the next one
month. These measures are expected to inject fresh liquidity of ~`48,000cr in the system,
thereby helping in easing liquidity pressures to an extent.
Inflation moderated, but target inflation on an upside risk: The RBI believes that though
inflation has moderated, inflationary pressures persist both from domestic demand and
higher global commodity prices. It also believes that rising international commodity prices
will spill over into domestic inflation, and rising domestic input costs for the manufacturing
sector combined with aggregate demand pressures could weigh on domestic inflation,
going forward. The RBI has indicated an upside risk to its projection of 5.5% inflation by
March 2011.
Outlook – Continue to prefer high CASA banks: While the fast-rising term deposit rates are
expected to put pressure on the NIMs of banks, we believe larger banks having a higher
proportion of CASA will be better placed to cope with the expected NIM pressures as
compared to low-CASA banks. Among the large banks, we prefer ICICI Bank and Axis
Bank in the private sector; and SBI and BoB in the PSU banking space. Among mid-cap
banks, we prefer IOB, Dena Bank, Jammu & Kashmir Bank and Federal Bank.
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