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Indian financials -Liquidity outlook
In recent months, liquidity in the money market has tightened due to a
confluence of (a) surge in working capital linked credit demand that
banks seem to have misread, (b) RBI’s averseness to infuse liquidity until
recently, (c) rise in share of currency with public and (d) delay in
government spending. Liquidity has eased after RBI’s recent intervention
and we expect it to ease further due to (a) RBI becoming accommodative
to infuse liquidity as banks have turned cautious on lending (b) pick-up in
government spending (c) pick-up in deposit mobilisation led by rise in
deposit rates and (d) stabilising commodity prices that will ease working
capital demand. Easing liquidity conditions and fall in interest rates may
drive a rally in quality wholesale funded institutions that have underperformed
banks and trade close to/ below average valuations. IDFC, Yes
Bank and PFC are our preferred picks.
Tight liquidity is not just due to lack of government spending
Over past few months four factors have contributed to the extremely tight
liquidity conditions and an inverted yield curve. Firstly, the surge in working
capital related credit demand has pushed-up loan growth by 500bps to 24%
YoY in a span of merely 3 months and it is now much ahead of deposit growth
(17%). Secondly, RBI had been rather unwilling to infuse additional liquidity,
until recently, due to its cautious view on aggressive lending by banks and
inflation. Thirdly, share of currency with public (within total money supply)
has been rising due to growing rural economy coupled with low bank deposit
rates. Lastly, delay in government spending in spite of higher than expected
receipts, tax collections and auction of telecom licenses, has withdrawn
liquidity from the money market.
Liquidity is easing and will improve further
Post Dec-10, liquidity conditions have eased (banks’ borrowings from RBI fell
30% to Rs1tn) due to a combination of RBI’s open market operations (OMO)
and pick-up in government spending. We also understand that RBI may have
become more willing to infusing additional liquidity because the newsflows on
scams have made banks highly cautious on lending towards risky/ speculative
activities and/ or groups which address RBI’s concerns of asset price inflation.
Pick-up in government spending may also improve liquidity conditions as the
government’s cash holding with RBI is estimated to be +Rs1tn (2% of
deposits). While the increase in deposit rates (+200bps since Jul-10) would
support deposit mobilisation, stability/ fall in commodity prices can moderate
working capital related credit demand.
Quality wholesale funded names may rally as short term yield correct
Over past three months, Bankex has corrected by 13% with PSU banks and
wholesale funded names (banks and NBFCs) underperforming. We believe
that improvement in liquidity will ease interest rates especially at the shortend,
which can lead to yield curve becoming flat or steeper again. Correction
in interest rates could lead to a rally in wholesale funded institutions that offer
a good loan growth visibility and currently trade near or below their five year
average valuations. IDFC, Yes Bank and PFC would be our preferred plays.
Appendix I: RBI monetary actions across cycle
RBI’s actions across the phases reflects on its stated policy objectives of
maintaining price stability and ensuring adequate flow of credit to productive
sectors. In Phase I, policy rate (repo) and reserve requirement (CRR) were
low and RBI started to raise interest rate in Phase II.
It is interesting to note, CRR is raised only when incremental LDR moderates
so as to ensure that supply of credit remains adequate. Tightening in Phase
III and IV was intense, just before conditions were built to re-enter Phase I.
Appendix II: Currency with public
Out of the total money supply, nearly 14% is held by public in cash and
majority of the rest in bank deposits. Since Jan-04, currency in circulation
growth has lagged growth in total money supply, except for brief periods of
time. However, since Apr-10 growth in currency with public has been ahead of
M3 growth. As a result, the share of currency with public within total money
supply (M3) has increased for the first time since FY05 due to a combination
of low rates and buoyant rural economy.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian financials -Liquidity outlook
In recent months, liquidity in the money market has tightened due to a
confluence of (a) surge in working capital linked credit demand that
banks seem to have misread, (b) RBI’s averseness to infuse liquidity until
recently, (c) rise in share of currency with public and (d) delay in
government spending. Liquidity has eased after RBI’s recent intervention
and we expect it to ease further due to (a) RBI becoming accommodative
to infuse liquidity as banks have turned cautious on lending (b) pick-up in
government spending (c) pick-up in deposit mobilisation led by rise in
deposit rates and (d) stabilising commodity prices that will ease working
capital demand. Easing liquidity conditions and fall in interest rates may
drive a rally in quality wholesale funded institutions that have underperformed
banks and trade close to/ below average valuations. IDFC, Yes
Bank and PFC are our preferred picks.
Tight liquidity is not just due to lack of government spending
Over past few months four factors have contributed to the extremely tight
liquidity conditions and an inverted yield curve. Firstly, the surge in working
capital related credit demand has pushed-up loan growth by 500bps to 24%
YoY in a span of merely 3 months and it is now much ahead of deposit growth
(17%). Secondly, RBI had been rather unwilling to infuse additional liquidity,
until recently, due to its cautious view on aggressive lending by banks and
inflation. Thirdly, share of currency with public (within total money supply)
has been rising due to growing rural economy coupled with low bank deposit
rates. Lastly, delay in government spending in spite of higher than expected
receipts, tax collections and auction of telecom licenses, has withdrawn
liquidity from the money market.
Liquidity is easing and will improve further
Post Dec-10, liquidity conditions have eased (banks’ borrowings from RBI fell
30% to Rs1tn) due to a combination of RBI’s open market operations (OMO)
and pick-up in government spending. We also understand that RBI may have
become more willing to infusing additional liquidity because the newsflows on
scams have made banks highly cautious on lending towards risky/ speculative
activities and/ or groups which address RBI’s concerns of asset price inflation.
Pick-up in government spending may also improve liquidity conditions as the
government’s cash holding with RBI is estimated to be +Rs1tn (2% of
deposits). While the increase in deposit rates (+200bps since Jul-10) would
support deposit mobilisation, stability/ fall in commodity prices can moderate
working capital related credit demand.
Quality wholesale funded names may rally as short term yield correct
Over past three months, Bankex has corrected by 13% with PSU banks and
wholesale funded names (banks and NBFCs) underperforming. We believe
that improvement in liquidity will ease interest rates especially at the shortend,
which can lead to yield curve becoming flat or steeper again. Correction
in interest rates could lead to a rally in wholesale funded institutions that offer
a good loan growth visibility and currently trade near or below their five year
average valuations. IDFC, Yes Bank and PFC would be our preferred plays.
Appendix I: RBI monetary actions across cycle
RBI’s actions across the phases reflects on its stated policy objectives of
maintaining price stability and ensuring adequate flow of credit to productive
sectors. In Phase I, policy rate (repo) and reserve requirement (CRR) were
low and RBI started to raise interest rate in Phase II.
It is interesting to note, CRR is raised only when incremental LDR moderates
so as to ensure that supply of credit remains adequate. Tightening in Phase
III and IV was intense, just before conditions were built to re-enter Phase I.
Appendix II: Currency with public
Out of the total money supply, nearly 14% is held by public in cash and
majority of the rest in bank deposits. Since Jan-04, currency in circulation
growth has lagged growth in total money supply, except for brief periods of
time. However, since Apr-10 growth in currency with public has been ahead of
M3 growth. As a result, the share of currency with public within total money
supply (M3) has increased for the first time since FY05 due to a combination
of low rates and buoyant rural economy.
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