India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Mid-Quarter Monetary Policy Review
RBI to inject liquidity
- § Keeps repo, reverse repo rates and cash reserve ratio unchanged
- § SLR reduced by 1.0% to 24.0%
- § Additional liquidity support at 1% of NDTL
- § To conduct OMO auctions for purchase of G-Secs of up to Rs48,000cr
Moderate measures for easing the liquidity crunch
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.
Until February 2010, food and textiles contributed as much as 63% to the overall
9.7% WPI inflation on account of the drought-driven increase in prices of food
grains, sugar and cotton, among others. By November 2010, their contribution to
the 7.5% WPI was on a downward trend, though still high at 44%. Oil’s
contribution to overall inflation increased to 19% from 13%. Contribution of other
items (having 55% weightage in the WPI index) increased to 37% in November
2010 due to increased prices of coal, metals, electricity and wood products,
among others, indicating that inflation is becoming more broad-based.
Liquidity pressures and credit-deposit growth gap to
continue to have upward pressure on interest rates
According to the RBI, while the overall liquidity in the system has remained in
deficit, consistent with the policy stance, the extent of tightness has been beyond its
comfort level. As per the RBI, this is mainly due to persistence of large government
cash balances, which have averaged ~`84,000cr since the last policy review in
November 2010.
As per the latest data, credit growth has increased to 23%, while deposit growth
continues to lag far behind at 15%, leading to a gap between savings and
investments, which is being plugged by the high current account deficit at present.
Over the course of the year, we expect deposit and lending rates to be on an
upward trajectory. In line with our expectations, almost all banks have already
increased their retail fixed deposit rates (in most cases between 50–150bp) over
the past one month, and we believe the bias for deposit rates will remain upwards.
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.
No comments:
Post a Comment