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3QFY11 monetary policy
As part of the monetary policy, RBI has raised policy interest rates by
25bps, but retained reserve requirement. Inflationary pressures are
high (RBI raised Mar-11 expectation of WPI by 150bps to 7.5%) and
these will drive ~50bps hike in policy rates. However, policy was
neutral to addressing tight liquidity conditions and as a result, shortterm
rates may remain high and normalisation of yield curve may be
gradual. We prefer banks with strong CASA franchise and lower asset
quality headwinds and cost pressures like HDFC Bank and ICICI Bank.
RBI policy targets inflation, but neutral on liquidity
RBI has raised policy rates by 25bps (repo rate to 6.5% and reverse repo to
5.5%), but CRR and SLR have been retained at 6% and 24% of liabilities. RBI
expects inflationary pressures to remain high and we believe this will
necessitate ~50bps hike in rates. However, policy was neutral on improving
the tightness in the liquidity situation. Though RBI has extended special SLR
window allowing banks to borrow up to 1ppt of SLR till April-11, there is no
new measure to improve primary liquidity. RBI has also asked banking sector
to bridge the wide gap between credit growth (24%) and deposit growth
(16%) by improving deposit mobilisation and moderating the credit growth
closer to RBI’s projected level of 20%.
Normalisation of yield curve likely to be gradual
Over the past month, liquidity situation has improved driven by RBI’s open
market operations and some government spending, but banks continue to
borrow ~Rs1.1tn (2.5% of deposits) from RBI. With tight liquidity situation
likely to persist in the near term coupled with strong demand for working
capital loans, rates for short-term wholesale borrowings may remain high and
normalisation of yield curve could be gradual. We believe that improvement in
liquidity will be function of (1) pick-up in government spending as their cash
holding is high and spending is seasonally higher in 4Q, (2) improvement in
deposit mobilisation led by ~200bps hike in bank deposit rates since Jul-10
and (3) some moderation in credit growth.
Prefer banks with higher earnings visibility
Banks are likely to raise interest rates with a lag, but the deposit rate hikes
will be higher than hike in lending rates as loan-deposit ratio is near peak
(73%) and banks will seek to push-up deposit mobilisation to encourage
conversion of currency with public into bank deposits. We believe that banks
with higher CASA ratio and balanced maturity profile of assets and liabilities
are better positioned to defend margins. Private banks are also better placed
on asset quality trends and are not exposed to pension liabilities which will
support earnings growth and superior profitability. We prefer HDFC Bank and
ICICI Bank.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
3QFY11 monetary policy
As part of the monetary policy, RBI has raised policy interest rates by
25bps, but retained reserve requirement. Inflationary pressures are
high (RBI raised Mar-11 expectation of WPI by 150bps to 7.5%) and
these will drive ~50bps hike in policy rates. However, policy was
neutral to addressing tight liquidity conditions and as a result, shortterm
rates may remain high and normalisation of yield curve may be
gradual. We prefer banks with strong CASA franchise and lower asset
quality headwinds and cost pressures like HDFC Bank and ICICI Bank.
RBI policy targets inflation, but neutral on liquidity
RBI has raised policy rates by 25bps (repo rate to 6.5% and reverse repo to
5.5%), but CRR and SLR have been retained at 6% and 24% of liabilities. RBI
expects inflationary pressures to remain high and we believe this will
necessitate ~50bps hike in rates. However, policy was neutral on improving
the tightness in the liquidity situation. Though RBI has extended special SLR
window allowing banks to borrow up to 1ppt of SLR till April-11, there is no
new measure to improve primary liquidity. RBI has also asked banking sector
to bridge the wide gap between credit growth (24%) and deposit growth
(16%) by improving deposit mobilisation and moderating the credit growth
closer to RBI’s projected level of 20%.
Normalisation of yield curve likely to be gradual
Over the past month, liquidity situation has improved driven by RBI’s open
market operations and some government spending, but banks continue to
borrow ~Rs1.1tn (2.5% of deposits) from RBI. With tight liquidity situation
likely to persist in the near term coupled with strong demand for working
capital loans, rates for short-term wholesale borrowings may remain high and
normalisation of yield curve could be gradual. We believe that improvement in
liquidity will be function of (1) pick-up in government spending as their cash
holding is high and spending is seasonally higher in 4Q, (2) improvement in
deposit mobilisation led by ~200bps hike in bank deposit rates since Jul-10
and (3) some moderation in credit growth.
Prefer banks with higher earnings visibility
Banks are likely to raise interest rates with a lag, but the deposit rate hikes
will be higher than hike in lending rates as loan-deposit ratio is near peak
(73%) and banks will seek to push-up deposit mobilisation to encourage
conversion of currency with public into bank deposits. We believe that banks
with higher CASA ratio and balanced maturity profile of assets and liabilities
are better positioned to defend margins. Private banks are also better placed
on asset quality trends and are not exposed to pension liabilities which will
support earnings growth and superior profitability. We prefer HDFC Bank and
ICICI Bank.
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