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It's all about inflation now
The 50 bp policy rate hike by RBI surprised markets. Savings rate hike and higher
provision requirements could dent banks' profits. Stay underweight financials.
RBI hiked the policy repo rate by 50 bp versus consensus expectation of 25 bp
! The RBI's policy action today was a departure from its earlier stance of measured rate hikes.
The RBI hikes the repo rate by 25 bp eight times from March 2010 through March 2011 for a
cumulative total of 200 bp.
It's all about inflation now; policy expected to remain inflation focused
! The higher than expected rate rise reflects RBI's view that the current elevated rate of inflation
poses significant risks to future growth. As such, bringing inflation down takes precedence
over growth in the short-run. The RBI expects to "persevere with its anti inflationary stance"
and would aim to maintain an interest rate environment that moderates inflation and anchors
inflation expectations.
Inflation expected to stay close to 9% through September
! RBI expects headline WPI inflation to stay close to 9% through September as it incorporates
an upward revision in petrol and diesel prices. RBI believes that domestic retail petroleum
prices should be adjusted as soon as possible even though this would add to inflation in the
short term. RBI expects inflation to gradually moderate to 6% (with an upward bias) by March
2012. We had highlighted the risk of elevated inflation through September "Ignore oil at your
own peril" dated 8 April 2011 and "Inflation surprises again" dated 15 April 2011.
Savings rate hike and higher provision requirements to crimp bank profitability
! RBI had released a discussion paper on the deregulation of savings bank deposit interest rate
on April 28, 2011. Pending a final decision on deregulation, RBI has increased the savings
bank deposit interest rate from the present 3.5% to 4.0% with immediate effect. As savings
accounts represent around 22% of total deposits, this would pari passu raise the banks' cost
of deposits by 11 bp.
! Separately, the Reserve Bank has also increased provisioning requirements for non
performing and restructured loans as follows:
! a) Sub-standard non performing loans
! i. Secured: to 15% from 10%
! ii. Unsecured: to 25% from 20%
! b) Secured portion of doubtful advances
! i. Up to one year: to 25 % from 20 %
! ii. More than one year but upto 3 years: to 40 % from 30%
! c) Restructured accounts classified as standard advances: 2 % from 0.25-1.00%
! Though banks may raise lending rates to offset these deposit rate and provision increases,
we think banks' profitability will suffer in the near term.
RBI FY12 GDP forecast of 8% assuming $110 a barrel crude
! RBI's FY12 GDP growth forecast of 8% (90% confidence interval of 7.4-8.5%) is significantly
below the central government's forecast of 8.75%, and assumes crude averages $110 a
barrel for FY11.
! For FY12, RBI projects M3 growth of 16.0%, aggregate schedule commercial bank deposit
growth of 17.0%, and non-food credit growth of 19.0%. We think there could be downside risk
to RBI's credit growth estimate to around 15-17%.
Stay cautious on the market and financials for now
! We recommend staying with the cautious stance on the market and financials we had
highlighted in "Ignore oil at your own peril" dated 8 April 2011. We think 5200-5300 on the
Nifty Index may be a better entry point for the market, where the index would trade at a
forward P/E of around 14x - in line with its ten year average.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
It's all about inflation now
The 50 bp policy rate hike by RBI surprised markets. Savings rate hike and higher
provision requirements could dent banks' profits. Stay underweight financials.
RBI hiked the policy repo rate by 50 bp versus consensus expectation of 25 bp
! The RBI's policy action today was a departure from its earlier stance of measured rate hikes.
The RBI hikes the repo rate by 25 bp eight times from March 2010 through March 2011 for a
cumulative total of 200 bp.
It's all about inflation now; policy expected to remain inflation focused
! The higher than expected rate rise reflects RBI's view that the current elevated rate of inflation
poses significant risks to future growth. As such, bringing inflation down takes precedence
over growth in the short-run. The RBI expects to "persevere with its anti inflationary stance"
and would aim to maintain an interest rate environment that moderates inflation and anchors
inflation expectations.
Inflation expected to stay close to 9% through September
! RBI expects headline WPI inflation to stay close to 9% through September as it incorporates
an upward revision in petrol and diesel prices. RBI believes that domestic retail petroleum
prices should be adjusted as soon as possible even though this would add to inflation in the
short term. RBI expects inflation to gradually moderate to 6% (with an upward bias) by March
2012. We had highlighted the risk of elevated inflation through September "Ignore oil at your
own peril" dated 8 April 2011 and "Inflation surprises again" dated 15 April 2011.
Savings rate hike and higher provision requirements to crimp bank profitability
! RBI had released a discussion paper on the deregulation of savings bank deposit interest rate
on April 28, 2011. Pending a final decision on deregulation, RBI has increased the savings
bank deposit interest rate from the present 3.5% to 4.0% with immediate effect. As savings
accounts represent around 22% of total deposits, this would pari passu raise the banks' cost
of deposits by 11 bp.
! Separately, the Reserve Bank has also increased provisioning requirements for non
performing and restructured loans as follows:
! a) Sub-standard non performing loans
! i. Secured: to 15% from 10%
! ii. Unsecured: to 25% from 20%
! b) Secured portion of doubtful advances
! i. Up to one year: to 25 % from 20 %
! ii. More than one year but upto 3 years: to 40 % from 30%
! c) Restructured accounts classified as standard advances: 2 % from 0.25-1.00%
! Though banks may raise lending rates to offset these deposit rate and provision increases,
we think banks' profitability will suffer in the near term.
RBI FY12 GDP forecast of 8% assuming $110 a barrel crude
! RBI's FY12 GDP growth forecast of 8% (90% confidence interval of 7.4-8.5%) is significantly
below the central government's forecast of 8.75%, and assumes crude averages $110 a
barrel for FY11.
! For FY12, RBI projects M3 growth of 16.0%, aggregate schedule commercial bank deposit
growth of 17.0%, and non-food credit growth of 19.0%. We think there could be downside risk
to RBI's credit growth estimate to around 15-17%.
Stay cautious on the market and financials for now
! We recommend staying with the cautious stance on the market and financials we had
highlighted in "Ignore oil at your own peril" dated 8 April 2011. We think 5200-5300 on the
Nifty Index may be a better entry point for the market, where the index would trade at a
forward P/E of around 14x - in line with its ten year average.
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