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Brake on inflationary expectations becoming difficult...
Key policy measures announced
• Repo and reverse repo rate under the LAF have been hiked by 25
bps each to 6.5% and 5.5%, respectively
• SLR leeway of 1% extended to April 8, 2011 from January 28,
2011 earlier
• Second LAF will be conducted on a daily basis till April 8, 2011
• Bank rate and CRR have been retained at 6.0%
• WPI inflation target has been raised to 7.0% from 5.5% earlier
• GDP growth projection has been maintained at 8.5%
• Credit and Deposit growth estimates kept intact at 20% & 18%
respectively for FY11
Policy rate hike did not surprise us
RBI’s action was in line with our as well as the market’s expectation.
Inflation target of 7% is slightly on a higher side, and may result in
continued policy actions ahead. We expect another 50-75 bps hike in
policy rates for CY11. The liquidity scenario will remain tight and is
expected to ease as the government balance reins down.
In such a scenario, our base case scenario of 20-21% credit growth and
15-17% deposit growth stays unaffected. Hence, we have not revised our
estimates for the I-direct coverage universe.
Impact Analysis
Rising inflation – still worrisome
The headline inflation, which observed moderation during AugustNovember 2010, reversed and jumped in December 2010 to 8.4%. This
can be attributed to rising food inflation even with normal monsoons
where production was not affected. Also, prices of many commodities
firmed up in the recent period on anticipation of global recovery adding
pressure to inflation and inflationary expectations.
We believe the RBI is maintaining slightly tighter liquidity in order to
prevent building of further inflationary expectations. A balance between
growth and inflation is a must. Hence, a gradual pace of rate hikes is seen.
The lag effect would play out in the coming quarter. We expect inflation
to stay in the 6 -7% range during the coming few quarters.
The RBI has revised upwards the WPI inflation target for FY11 to 7% from
5.5% earlier.
Tight liquidity continues exerting pressure on short term rates…
Liquidity tightness though intentional has surpassed RBI’s comfort zone of
+-1% of NDTL. The government holding of cash balance of | 1,53,000
crore at peak level in Dec’10 contributed mostly to such an outcome. The
RBI introduced many measures to address such a situation by reducing
the SLR to 24%, OMO purchase of government securities and
introduction of a second LAF window. Lately, government spending has
picked up resulting in lower cash balance of | 90,000 crore.
Short term rates are still high with call rate at 6.65% and 1yr AAA bonds
trading around 9.1% to 9.2%. The 10 year yields have remained around
8.1% to 8.2% for last 15 days on account of tight liquidity and rising
inflation. We expect yields to stay above 8% for some more time and
treasury book of certain banks to be impacted accordingly.
We expect banks to face a liquidity crisis till March 2011 as the busy
season for credit creeps in and deposit growth still lags behind. Deposit
rates should continue to rise and the full impact of rising costs should be
visible in Q4FY11 and Q1FY12 wherein NIMs are expected to shrink about
15-20 bps.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Brake on inflationary expectations becoming difficult...
Key policy measures announced
• Repo and reverse repo rate under the LAF have been hiked by 25
bps each to 6.5% and 5.5%, respectively
• SLR leeway of 1% extended to April 8, 2011 from January 28,
2011 earlier
• Second LAF will be conducted on a daily basis till April 8, 2011
• Bank rate and CRR have been retained at 6.0%
• WPI inflation target has been raised to 7.0% from 5.5% earlier
• GDP growth projection has been maintained at 8.5%
• Credit and Deposit growth estimates kept intact at 20% & 18%
respectively for FY11
Policy rate hike did not surprise us
RBI’s action was in line with our as well as the market’s expectation.
Inflation target of 7% is slightly on a higher side, and may result in
continued policy actions ahead. We expect another 50-75 bps hike in
policy rates for CY11. The liquidity scenario will remain tight and is
expected to ease as the government balance reins down.
In such a scenario, our base case scenario of 20-21% credit growth and
15-17% deposit growth stays unaffected. Hence, we have not revised our
estimates for the I-direct coverage universe.
Impact Analysis
Rising inflation – still worrisome
The headline inflation, which observed moderation during AugustNovember 2010, reversed and jumped in December 2010 to 8.4%. This
can be attributed to rising food inflation even with normal monsoons
where production was not affected. Also, prices of many commodities
firmed up in the recent period on anticipation of global recovery adding
pressure to inflation and inflationary expectations.
We believe the RBI is maintaining slightly tighter liquidity in order to
prevent building of further inflationary expectations. A balance between
growth and inflation is a must. Hence, a gradual pace of rate hikes is seen.
The lag effect would play out in the coming quarter. We expect inflation
to stay in the 6 -7% range during the coming few quarters.
The RBI has revised upwards the WPI inflation target for FY11 to 7% from
5.5% earlier.
Tight liquidity continues exerting pressure on short term rates…
Liquidity tightness though intentional has surpassed RBI’s comfort zone of
+-1% of NDTL. The government holding of cash balance of | 1,53,000
crore at peak level in Dec’10 contributed mostly to such an outcome. The
RBI introduced many measures to address such a situation by reducing
the SLR to 24%, OMO purchase of government securities and
introduction of a second LAF window. Lately, government spending has
picked up resulting in lower cash balance of | 90,000 crore.
Short term rates are still high with call rate at 6.65% and 1yr AAA bonds
trading around 9.1% to 9.2%. The 10 year yields have remained around
8.1% to 8.2% for last 15 days on account of tight liquidity and rising
inflation. We expect yields to stay above 8% for some more time and
treasury book of certain banks to be impacted accordingly.
We expect banks to face a liquidity crisis till March 2011 as the busy
season for credit creeps in and deposit growth still lags behind. Deposit
rates should continue to rise and the full impact of rising costs should be
visible in Q4FY11 and Q1FY12 wherein NIMs are expected to shrink about
15-20 bps.
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