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RBI raises policy rates by 25bps; CRR remains unchanged
Reserve Bank of India continued with its calibrated approach towards the
normalization of policy rates raising the Repo and Reverse Repo rate by 25bps to
6.75% and 5.75% respectively. It also expressed concerns about the shift in the
drivers of inflation to the non food manufactured products and revised its inflation
target for FY11 to 8% from the earlier target of 7%. The cash reserve ratio (CRR) of
scheduled banks has also been retained at 6.0% of net demand and time liabilities
(NDTL)
Key concerns going ahead
Shift in inflation drivers to be a concern
Although inflation witnessed a respite in the month of January due to the sharp
correction in food articles prices, an increase non food manufactured products
prices continues to be a concern for the central bank
For the month of Feb-11 food articles inflation eased to 14.79% YoY compared to
17.28% in Jan-11. However the manufacturing index (accounting for 65% of the
WPI) witnessed a sharp rise of 4.94% in Feb-11 compared to 3.75% in Jan-11
indicating a gradual spill over of the food and commodity prices into more
generalized inflation
RBI revised its target inflation of 7% for FY11 as per the third quarter review to
8% factoring in the impact of freely priced petroleum products, increase in the
administered coal prices and pick up in the manufacturing product prices
Financing the credit-deposit growth gap
The direct fall out of the rising inflation and the negative real interest situation
has been the sluggish growth of deposits. Deposit growth floated around the
15.50% level compared to 18% target set by the central bank for FY11
In order to achieve the target deposit growth of 18% for FY11, banks have to
mobilize another INR2.10trn in the month of March-11 (YTD mobilization at INR
5.97trn). With persistently high inflation, banks are unlikely to achieve the target
set by RBI
Due to the credit off take outpacing the deposit growth consistently for FY11,
banks have resorted to their excess SLR investment and the short term
borrowing through the CD market to sustain their growth target. Central bank
has already highlighted the concerns of rising Credit-Deposit (CD) ratio and ALM
mismatch at its last policy review in Jan-11
At the pace credit is growing, banks will have to garner additional deposits of at
least another INR 3.50trn so as to maintain its CD ratio under 75. Given that
SCBs have managed to achieve an average growth of 12% per annum in the
incremental deposits for the last four years, this will put upward pressure on the
interest rates
CAD supported by the robust export growth
RBI revised the CAD estimate for FY11 to 2.50% of GDP backed by the robust
export performance. India witnessed a robust growth clocking in a cumulative
export of USD 184.6bn for Apr-Jan, 29.30% higher than the same period last
year
Although the import growth has been relatively stable at USD 273.6bn for Apr-
Jan, 17.60% higher than same period last year, the volatility in the energy prices
could put upside pressure on the oil import bill
The trade deficit is currently funded by the volatile portfolio flows which tend to
be an unpredictable source for sustainable balance of payment. The central bank
expressed the need to focus on more foreign direct investments to fund the trade
deficit
Interest rates to edge higher; frontloaded borrowing from GoI
LAF borrowing continued to stay outside the comfort zone of +/- 1% of NDTL
despite an aggressive drawdown of the surplus cash balance. Liquidity is likely to
remain under pressure due to temporary factors like the advance taxes collection
and more continuing factors which include the disinvestment as well as the
~INR110bn – INR 120bn borrowing by GoI every week
Although the gross borrowing target of INR 4.17trn is lower than expected, the
net borrowing at INR 3.43trn due to the lower redemption this year. Typically
GoI front loads 60%-65% of the total borrowing in the first two quarters which
leads to a drain of about INR 90bn – INR 110bn in the first 23 weeks of FY12.
Besides these weekly auctions, GoI has planned disinvestment of about INR
250bn in the H1FY12 which will drain the system liquidity further
With short terms already reining under the tight liquidity pressure (three month
CD rates at 10%) rates may rise further once the borrowing from GoI beginning
in FY12
Long term interest rates, although comforted by the fiscal consolidation pointed
out in the budget, are likely to witness pressure on the upside since commitment
to contain the subsidies are farfetched. In the Union Budget, GoI declared a
target deficit of 4.60%; however the subsidy bill seems to grossly understate the
subsidies at INR 1.43trn. With continuing uncertainty about the energy and
commodity prices the fiscal deficit target has a high risk of surprising on the
upside in the second half of FY12, leading to a sharp rise in the long term yields
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RBI raises policy rates by 25bps; CRR remains unchanged
Reserve Bank of India continued with its calibrated approach towards the
normalization of policy rates raising the Repo and Reverse Repo rate by 25bps to
6.75% and 5.75% respectively. It also expressed concerns about the shift in the
drivers of inflation to the non food manufactured products and revised its inflation
target for FY11 to 8% from the earlier target of 7%. The cash reserve ratio (CRR) of
scheduled banks has also been retained at 6.0% of net demand and time liabilities
(NDTL)
Key concerns going ahead
Shift in inflation drivers to be a concern
Although inflation witnessed a respite in the month of January due to the sharp
correction in food articles prices, an increase non food manufactured products
prices continues to be a concern for the central bank
For the month of Feb-11 food articles inflation eased to 14.79% YoY compared to
17.28% in Jan-11. However the manufacturing index (accounting for 65% of the
WPI) witnessed a sharp rise of 4.94% in Feb-11 compared to 3.75% in Jan-11
indicating a gradual spill over of the food and commodity prices into more
generalized inflation
RBI revised its target inflation of 7% for FY11 as per the third quarter review to
8% factoring in the impact of freely priced petroleum products, increase in the
administered coal prices and pick up in the manufacturing product prices
Financing the credit-deposit growth gap
The direct fall out of the rising inflation and the negative real interest situation
has been the sluggish growth of deposits. Deposit growth floated around the
15.50% level compared to 18% target set by the central bank for FY11
In order to achieve the target deposit growth of 18% for FY11, banks have to
mobilize another INR2.10trn in the month of March-11 (YTD mobilization at INR
5.97trn). With persistently high inflation, banks are unlikely to achieve the target
set by RBI
Due to the credit off take outpacing the deposit growth consistently for FY11,
banks have resorted to their excess SLR investment and the short term
borrowing through the CD market to sustain their growth target. Central bank
has already highlighted the concerns of rising Credit-Deposit (CD) ratio and ALM
mismatch at its last policy review in Jan-11
At the pace credit is growing, banks will have to garner additional deposits of at
least another INR 3.50trn so as to maintain its CD ratio under 75. Given that
SCBs have managed to achieve an average growth of 12% per annum in the
incremental deposits for the last four years, this will put upward pressure on the
interest rates
CAD supported by the robust export growth
RBI revised the CAD estimate for FY11 to 2.50% of GDP backed by the robust
export performance. India witnessed a robust growth clocking in a cumulative
export of USD 184.6bn for Apr-Jan, 29.30% higher than the same period last
year
Although the import growth has been relatively stable at USD 273.6bn for Apr-
Jan, 17.60% higher than same period last year, the volatility in the energy prices
could put upside pressure on the oil import bill
The trade deficit is currently funded by the volatile portfolio flows which tend to
be an unpredictable source for sustainable balance of payment. The central bank
expressed the need to focus on more foreign direct investments to fund the trade
deficit
Interest rates to edge higher; frontloaded borrowing from GoI
LAF borrowing continued to stay outside the comfort zone of +/- 1% of NDTL
despite an aggressive drawdown of the surplus cash balance. Liquidity is likely to
remain under pressure due to temporary factors like the advance taxes collection
and more continuing factors which include the disinvestment as well as the
~INR110bn – INR 120bn borrowing by GoI every week
Although the gross borrowing target of INR 4.17trn is lower than expected, the
net borrowing at INR 3.43trn due to the lower redemption this year. Typically
GoI front loads 60%-65% of the total borrowing in the first two quarters which
leads to a drain of about INR 90bn – INR 110bn in the first 23 weeks of FY12.
Besides these weekly auctions, GoI has planned disinvestment of about INR
250bn in the H1FY12 which will drain the system liquidity further
With short terms already reining under the tight liquidity pressure (three month
CD rates at 10%) rates may rise further once the borrowing from GoI beginning
in FY12
Long term interest rates, although comforted by the fiscal consolidation pointed
out in the budget, are likely to witness pressure on the upside since commitment
to contain the subsidies are farfetched. In the Union Budget, GoI declared a
target deficit of 4.60%; however the subsidy bill seems to grossly understate the
subsidies at INR 1.43trn. With continuing uncertainty about the energy and
commodity prices the fiscal deficit target has a high risk of surprising on the
upside in the second half of FY12, leading to a sharp rise in the long term yields
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