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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
From pro-growth to anti inflation- coming hard at all
ends…
Key policy measures announced
• RBI policy has shifted to a single rate regime
• Operating target of policy to be weighted average call money rate
• The RBI has hiked the repo rate by 50 bps to 7.25% with
immediate effect and reverse repo rate by 50 bps to 6.25%
• RBI has kept the bank rate and CRR unchanged at 6.0%
• It has upped the savings bank rate to 4.0% from 3.5% with
immediate effect
• RBI has started a marginal standing facility for banks at 8.25%
Projections for FY12
• GDP growth in 7.4-8.5% range
• Inflation at 6.0% with an upward bias
• Money supply growth at 16%
• Credit growth of 19%, deposit growth at 17%
Impact Analysis
We believe fixing of the LAF corridor at 100 bps with the repo rate being
the single policy rate from now on will enable smooth and effective
transformation of policy actions. In the near term, we see the NIM of
banks moderating by 10-15 bps in FY12E (shown in Exhibit 2). The RBI
has also come down hard on the provisioning requirement but we believe
banks with higher than required provisions are well protected on this
front. We understand that the need to control inflation and inflationary
expectations are the apex criteria for RBI. This could be taken as a step in
the right direction. We believe banks with high capacity to pass on rising
cost of funds are better placed to withstand it in this phase.
The Backdrop as explained
First, global commodity prices, which have surged in recent months,
are, at best, likely to remain firm and may well increase further over the
course of the year. This suggests that higher inflation will persist and
may indeed get worse.
Second, headline and core inflation have significantly overshot even the
most pessimistic projections over the past few months. This raises
concerns about inflation expectations becoming unhinged.
The third factor, one countering the above forces, is the likely
moderation in demand, which should help reduce pricing power and
the extent of pass-through of commodity prices. This contra trend
cannot be ignored in the policy calculation. However, a significant factor
influencing aggregate demand during the year will be the fiscal
situation. The Budget estimates offered reassurance of a fiscal rollback.
However, the critical assumption, that petroleum and fertiliser subsidies
would be capped is bound to be seriously tested at prevailing crude oil
prices. Even though an adjustment of domestic retail prices may add to
the inflation rate in the short run, the Reserve Bank of India believes that
this needs to be done as soon as possible. Otherwise, the fiscal deficit will
widen and will counter the moderating trend in aggregate demand.
Impact Analysis continues…
…Impact of hike in savings interest rate to 4%
The RBI is finally on the path of deregulating the savings interest rate. A
few days back, the RBI released a discussion paper on the same. The
decision is pending on the same. Under such a backdrop, the central bank
decided to raise the savings bank deposit rate from the current 3.5% to
4% with immediate effect.
Our study shows that the impact of such a move would be more on banks
with higher savings proportion like HDFC Bank, SBI, BoB, PNB and Axis
Bank with their NIM affected by 10-15 bps.
…Marginal standing facility rate determined at repo+ 100 bps
The Reserve Bank has initiated several measures to ease the liquidity
situation in the economy.
(a) Additional liquidity support under the liquidity adjustment facility
(LAF) to SCBs up to 1% of their NDTL by temporary waiver of
penal interest for any shortfall in maintenance of statutory
liquidity ratio (SLR). For a brief period, the limit was 2% of NDTL,
which was reduced to 1% following the permanent reduction in
the SLR
(b) Reduction in the SLR by 1%
(c) Conducting open market operations
(d) Conducting the second LAF (SLAF) on a daily basis
Now, liquidity conditions have eased significantly in recent weeks,
following a sharp reduction in government cash balances and moderation
in the CRR of banks. Consequently, the net liquidity injected by the RBI
through its repo operations declined from a daily average of around |
1,20,000 crore in December 2010 to around | 81,000 crore in March 2011.
The average daily net liquidity injected by the Reserve Bank fell sharply to
| 19,000 crore in April 2011 as government balances moved from positive
to negative.
Easing liquidity conditions make it difficult to transfer policy actions. On
the recommendation of the Working Group to Review the Operating
Procedure of Monetary Policy, the RBI instituted a new marginal standing
facility (MSF). Under this facility, banks can borrow overnight from the
MSF up to 1% of their respective NDTL. The rate of interest on amounts
accessed from this facility will be 100 basis points above the repo rate.
Case analysis
Under such a scenario, banks would be required to maintain 24% SLR.
Banks, which are maintaining higher SLR, say 27% would be allowed to
borrow 3% of their NDTL at repo rate (@7.25%). On the other hand,
banks that are unable to maintain SLR, say 23% (since RBI provides such
a leeway for a specified time) would be now required to borrow at repo+
100 bps i.e. at 8.25%. In our view, banks that are already maintaining
higher then statutory required SLR (like HDFC Bank, SBI, Bank of Baroda,
Punjab National Bank) would be not be impacted by such a move.
Move to avoid circular flow of funds between banks and mutual funds
It has been observed that banks’ investments in liquid schemes of debt
oriented mutual funds (DoMFs) have grown manifold. As per AMFI data,
banks/FI had | 12,750 crore invested into the liquid schemes of mutual
funds accounting for ~17% of the total liquid funds AUM of | 74700 crore
as on March 31, 2011. The liquid schemes rely heavily on institutional
investors such as commercial banks.
The DoMFs are large lenders in overnight markets such as collateralised
borrowing and lending obligation (CBLO) and market repo where banks
are large borrowers. The DoMFs, especially liquid schemes, invest heavily
in certificates of deposit (CDs) of banks (~80-90% of the total corpus).
…Financial inclusion drive - may impact banks that envisage faster growth
of their distribution platform
During FY11, banks opened 5,214 new branches and provided banking
services in 43,337 villages. It is important to note that banks covered
24,066 villages with population above 2,000, in addition to covering
19,271 villages with population below 2,000 from these branches.
RBI believes there is a need to step up the opening of branches in rural
areas so as to improve banking penetration and financial inclusion rapidly
and meet the targets set out for providing banking services in villages
with population over 2,000. RBI’s new issuance requires the bank to
allocate at least 25% of the total number of branches to be opened during
a year to unbanked rural (Tier 5 and Tier 6) centres.
We believe banks that are eyeing faster branch network expansion plans
would be required to revisit their strategy. Banks like Yes Bank, South
Indian Bank, IDBI Bank, Lakshmi Vilas Bank and IndusInd Bank would be
impacted on account of this norm, in particular.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
From pro-growth to anti inflation- coming hard at all
ends…
Key policy measures announced
• RBI policy has shifted to a single rate regime
• Operating target of policy to be weighted average call money rate
• The RBI has hiked the repo rate by 50 bps to 7.25% with
immediate effect and reverse repo rate by 50 bps to 6.25%
• RBI has kept the bank rate and CRR unchanged at 6.0%
• It has upped the savings bank rate to 4.0% from 3.5% with
immediate effect
• RBI has started a marginal standing facility for banks at 8.25%
Projections for FY12
• GDP growth in 7.4-8.5% range
• Inflation at 6.0% with an upward bias
• Money supply growth at 16%
• Credit growth of 19%, deposit growth at 17%
Impact Analysis
We believe fixing of the LAF corridor at 100 bps with the repo rate being
the single policy rate from now on will enable smooth and effective
transformation of policy actions. In the near term, we see the NIM of
banks moderating by 10-15 bps in FY12E (shown in Exhibit 2). The RBI
has also come down hard on the provisioning requirement but we believe
banks with higher than required provisions are well protected on this
front. We understand that the need to control inflation and inflationary
expectations are the apex criteria for RBI. This could be taken as a step in
the right direction. We believe banks with high capacity to pass on rising
cost of funds are better placed to withstand it in this phase.
The Backdrop as explained
First, global commodity prices, which have surged in recent months,
are, at best, likely to remain firm and may well increase further over the
course of the year. This suggests that higher inflation will persist and
may indeed get worse.
Second, headline and core inflation have significantly overshot even the
most pessimistic projections over the past few months. This raises
concerns about inflation expectations becoming unhinged.
The third factor, one countering the above forces, is the likely
moderation in demand, which should help reduce pricing power and
the extent of pass-through of commodity prices. This contra trend
cannot be ignored in the policy calculation. However, a significant factor
influencing aggregate demand during the year will be the fiscal
situation. The Budget estimates offered reassurance of a fiscal rollback.
However, the critical assumption, that petroleum and fertiliser subsidies
would be capped is bound to be seriously tested at prevailing crude oil
prices. Even though an adjustment of domestic retail prices may add to
the inflation rate in the short run, the Reserve Bank of India believes that
this needs to be done as soon as possible. Otherwise, the fiscal deficit will
widen and will counter the moderating trend in aggregate demand.
Impact Analysis continues…
…Impact of hike in savings interest rate to 4%
The RBI is finally on the path of deregulating the savings interest rate. A
few days back, the RBI released a discussion paper on the same. The
decision is pending on the same. Under such a backdrop, the central bank
decided to raise the savings bank deposit rate from the current 3.5% to
4% with immediate effect.
Our study shows that the impact of such a move would be more on banks
with higher savings proportion like HDFC Bank, SBI, BoB, PNB and Axis
Bank with their NIM affected by 10-15 bps.
…Marginal standing facility rate determined at repo+ 100 bps
The Reserve Bank has initiated several measures to ease the liquidity
situation in the economy.
(a) Additional liquidity support under the liquidity adjustment facility
(LAF) to SCBs up to 1% of their NDTL by temporary waiver of
penal interest for any shortfall in maintenance of statutory
liquidity ratio (SLR). For a brief period, the limit was 2% of NDTL,
which was reduced to 1% following the permanent reduction in
the SLR
(b) Reduction in the SLR by 1%
(c) Conducting open market operations
(d) Conducting the second LAF (SLAF) on a daily basis
Now, liquidity conditions have eased significantly in recent weeks,
following a sharp reduction in government cash balances and moderation
in the CRR of banks. Consequently, the net liquidity injected by the RBI
through its repo operations declined from a daily average of around |
1,20,000 crore in December 2010 to around | 81,000 crore in March 2011.
The average daily net liquidity injected by the Reserve Bank fell sharply to
| 19,000 crore in April 2011 as government balances moved from positive
to negative.
Easing liquidity conditions make it difficult to transfer policy actions. On
the recommendation of the Working Group to Review the Operating
Procedure of Monetary Policy, the RBI instituted a new marginal standing
facility (MSF). Under this facility, banks can borrow overnight from the
MSF up to 1% of their respective NDTL. The rate of interest on amounts
accessed from this facility will be 100 basis points above the repo rate.
Case analysis
Under such a scenario, banks would be required to maintain 24% SLR.
Banks, which are maintaining higher SLR, say 27% would be allowed to
borrow 3% of their NDTL at repo rate (@7.25%). On the other hand,
banks that are unable to maintain SLR, say 23% (since RBI provides such
a leeway for a specified time) would be now required to borrow at repo+
100 bps i.e. at 8.25%. In our view, banks that are already maintaining
higher then statutory required SLR (like HDFC Bank, SBI, Bank of Baroda,
Punjab National Bank) would be not be impacted by such a move.
Move to avoid circular flow of funds between banks and mutual funds
It has been observed that banks’ investments in liquid schemes of debt
oriented mutual funds (DoMFs) have grown manifold. As per AMFI data,
banks/FI had | 12,750 crore invested into the liquid schemes of mutual
funds accounting for ~17% of the total liquid funds AUM of | 74700 crore
as on March 31, 2011. The liquid schemes rely heavily on institutional
investors such as commercial banks.
The DoMFs are large lenders in overnight markets such as collateralised
borrowing and lending obligation (CBLO) and market repo where banks
are large borrowers. The DoMFs, especially liquid schemes, invest heavily
in certificates of deposit (CDs) of banks (~80-90% of the total corpus).
…Financial inclusion drive - may impact banks that envisage faster growth
of their distribution platform
During FY11, banks opened 5,214 new branches and provided banking
services in 43,337 villages. It is important to note that banks covered
24,066 villages with population above 2,000, in addition to covering
19,271 villages with population below 2,000 from these branches.
RBI believes there is a need to step up the opening of branches in rural
areas so as to improve banking penetration and financial inclusion rapidly
and meet the targets set out for providing banking services in villages
with population over 2,000. RBI’s new issuance requires the bank to
allocate at least 25% of the total number of branches to be opened during
a year to unbanked rural (Tier 5 and Tier 6) centres.
We believe banks that are eyeing faster branch network expansion plans
would be required to revisit their strategy. Banks like Yes Bank, South
Indian Bank, IDBI Bank, Lakshmi Vilas Bank and IndusInd Bank would be
impacted on account of this norm, in particular.
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