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Monetary Policy Update (March 2011)
W H A T ’ S C H A N G E D …
CRR, Bank rate....................................................................................Unchanged at 6%
Repo rate................................................................................ Hiked by 25 bps to 6.75%
Reverse Repo rate.................................................................. Hiked by 25 bps to 5.75%
Rising inflation, rate hikes continue...
Key policy measures announced
• The repo rate and reverse repo rate under the LAF was hiked by
25 bps each to 6.75% and 5.75%, respectively
• The SLR and CRR were left unchanged at 6.0%
• WPI inflation target was raised to 8.0% from 7% earlier
• GDP growth projection was maintained at 8.5%
• The current account deficit target was lowered to 2.5%
Impact Analysis
The rate hike of 25 bps was in line with our expectations. However, the
raising of the inflation target to 8% from 7% reflects the RBI’s inability to
contain inflation. After a slight moderation in January, headline WPI
inflation reversed in February 2011 to 8.31% accompanied by a sharp
increase in non-food manufactured products inflation. We expect another
50 to 75 bps hike in policy rates for CY11.
Liquidity pressures are gradually easing with net liquidity injection
through LAF declining from an average of around | 93,000 crore in
January to | 79,000 crore in February 2011 and further to | 68,000 crore
in March (up to March 16). This was mainly due to an increase in
government spending and consequent decline in government cash
balances with the Reserve Bank. Going forward also, we believe liquidity
will remain adequate in the system and cool off CD and CP rates.
On account of the lower fiscal deficit target, G-Sec bond yields are
hovering in the range of 7.90-8.10%. However, with mounting oil prices
and other commodities also, higher inflation may lead to growth coming
under risk. Hence, if the subsidy burden cannot be capped, fiscal deficit
may have upside risks. All these can lead to G-sec yields rising in the
second half of FY12E.
We are at the fag end of the rate hike cycle. Hence, after a quarter of
slowdown, banking stocks should be able to maintain stable margins. The
price correction in banking sector stocks in the past six months has
brought most of the banks back to historical multiples (which got
expanded in Q2FY11). Hence, they offer long-term portfolio building
opportunities.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Monetary Policy Update (March 2011)
W H A T ’ S C H A N G E D …
CRR, Bank rate....................................................................................Unchanged at 6%
Repo rate................................................................................ Hiked by 25 bps to 6.75%
Reverse Repo rate.................................................................. Hiked by 25 bps to 5.75%
Rising inflation, rate hikes continue...
Key policy measures announced
• The repo rate and reverse repo rate under the LAF was hiked by
25 bps each to 6.75% and 5.75%, respectively
• The SLR and CRR were left unchanged at 6.0%
• WPI inflation target was raised to 8.0% from 7% earlier
• GDP growth projection was maintained at 8.5%
• The current account deficit target was lowered to 2.5%
Impact Analysis
The rate hike of 25 bps was in line with our expectations. However, the
raising of the inflation target to 8% from 7% reflects the RBI’s inability to
contain inflation. After a slight moderation in January, headline WPI
inflation reversed in February 2011 to 8.31% accompanied by a sharp
increase in non-food manufactured products inflation. We expect another
50 to 75 bps hike in policy rates for CY11.
Liquidity pressures are gradually easing with net liquidity injection
through LAF declining from an average of around | 93,000 crore in
January to | 79,000 crore in February 2011 and further to | 68,000 crore
in March (up to March 16). This was mainly due to an increase in
government spending and consequent decline in government cash
balances with the Reserve Bank. Going forward also, we believe liquidity
will remain adequate in the system and cool off CD and CP rates.
On account of the lower fiscal deficit target, G-Sec bond yields are
hovering in the range of 7.90-8.10%. However, with mounting oil prices
and other commodities also, higher inflation may lead to growth coming
under risk. Hence, if the subsidy burden cannot be capped, fiscal deficit
may have upside risks. All these can lead to G-sec yields rising in the
second half of FY12E.
We are at the fag end of the rate hike cycle. Hence, after a quarter of
slowdown, banking stocks should be able to maintain stable margins. The
price correction in banking sector stocks in the past six months has
brought most of the banks back to historical multiples (which got
expanded in Q2FY11). Hence, they offer long-term portfolio building
opportunities.
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