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Mid-Quarter Monetary Policy Review
Gradualist approach returns
Hikes repo rate by 25bp to 7.5%
Consequently reverse repo rate stands at 6.5% and MSF rate at 8.5%
Keeps SLR and CRR unchanged at 24.0% and 6.0%, respectively
The Reserve Bank of India (RBI) in line with our as well as street’s expectation
resumed its gradual monetary tightening stance and hiked the repo rate by 25bp.
In our view, this hike is unlikely to cause across-the-board increase in lending
rates as witnessed after the last policy review in May, due to relatively smaller
impact on the cost of funds as compared to a saving rate hike. The credit growth
has moderated from the recent peaks, as evident from decline in credit off-take
by 23.5% yoy in the last three months. With the sharp hike in term deposit rates
over the past six months, deposit accretion has picked up considerably, as
reflected in increase in deposit mobilization by 69% yoy in the last three months.
Policy stance remains firmly anti-inflationary
With the headline inflation rising from 8.7% in April 2011 to 9.1% in May 2011
and more importantly with the step up in core inflation (non-food manufacturing)
from 6.3% in April 2011 to 7.3% in May 2011, the RBI continued its policy
tightening stance and increased repo rate by 25bp to 7.5%. Concomitantly the
reverse repo rate stands at 6.5% and Marginal Standing Facility (MSF) rate has
increased to 8.5%. RBI has also highlighted upward revision risks in inflation data
for April and May, considering the revision of March 2011 headline inflation to
9.7% from 9.1%. More concerning fact for the RBI has been the increase in core
inflation to 7.3% which was already well above its medium-term trend of 4.0%.
The increase in core inflation, according to the RBI, indicates more generalization
of inflationary pressures, rising wages and costs of service inputs are apparently
being passed on by producers. However, on the positive side, the spread between
primary articles inflation and manufactured products inflation has narrowed
further to 4.0% during May 2011 from as high as 13.1% in January 2011,
suggesting good portion of pass-through of raw material costs has already taken
place, in our view.
Don’t expect lending rates to be hiked across-the-board
The hike of 25bp in this policy review was much softer compared to the last policy
review wherein both the repo rate as well as the savings rate was increased by
50bp each. The banks have hiked base rate by 150-300bps since it was
introduced in July, 2010. The higher interest costs are, to an extent, restraining
credit growth but it still remains fairly high. Also with the credit off-take showing
initial signs of moderation and relatively smaller impact on cost of funds of the
repo rate hike as compared to a saving rate hike, we expect the banks to go slow
with lending rate hikes.
RBI steers clear of SLR and CRR hike
The liquidity conditions have been consistent with the RBI’s anti-inflationary stance
front. Borrowings through the LAF window have declined from an average of
~`84,000cr during 4QFY2011 to `41,000cr in 1QFY2012 (up to June 15), but
still are within the central bank’s target zone of +/- 1% of NDTL. On account of
the continued liquidity deficit in the system, the RBI has kept the harsher statutory
liquidity ratio (SLR) and cash reserve ratio (CRR) unchanged at 24.0% and 6.0%,
respectively. Going forward, also the central bank is targeting to maintain liquidity
conditions such that neither surplus liquidity (stoking inflationary pressures) nor
large deficit (choking off fund flows to productive sectors of the economy).
Unlike in China where the harsher reserve rates have been hiked to record levels
to cool down credit growth by hiking lending rates, Indian credit growth has been
much more restrained and liquidity has remained in the deficit mode since July,
2010. This has resulted into a status quo on both Cash Reserve Ratio (CRR) since
April 2010 and Statutory Liquidity Ratio (SLR) since December 2010.
Outlook
We believe that the lending rates are likely to peak at a lower level in this cycle
compared to the previous one as the inadequacy of forex inflows in this cycle is
likely to lead to a weaker demand momentum. We expect the lending rates to
peak at ~50bp from the current levels. Hence, we maintain our positive stance on
the banking sector, taking into account the still healthy credit demand and good
earnings visibility for large banks.
We continue to recommend selective stock-picking strategy and favour the large
private sector banks over the public ones. Our top picks include Axis Bank and
ICICI Bank from the private banking universe and SBI and Bank of Baroda from
the public sector banks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mid-Quarter Monetary Policy Review
Gradualist approach returns
Hikes repo rate by 25bp to 7.5%
Consequently reverse repo rate stands at 6.5% and MSF rate at 8.5%
Keeps SLR and CRR unchanged at 24.0% and 6.0%, respectively
The Reserve Bank of India (RBI) in line with our as well as street’s expectation
resumed its gradual monetary tightening stance and hiked the repo rate by 25bp.
In our view, this hike is unlikely to cause across-the-board increase in lending
rates as witnessed after the last policy review in May, due to relatively smaller
impact on the cost of funds as compared to a saving rate hike. The credit growth
has moderated from the recent peaks, as evident from decline in credit off-take
by 23.5% yoy in the last three months. With the sharp hike in term deposit rates
over the past six months, deposit accretion has picked up considerably, as
reflected in increase in deposit mobilization by 69% yoy in the last three months.
Policy stance remains firmly anti-inflationary
With the headline inflation rising from 8.7% in April 2011 to 9.1% in May 2011
and more importantly with the step up in core inflation (non-food manufacturing)
from 6.3% in April 2011 to 7.3% in May 2011, the RBI continued its policy
tightening stance and increased repo rate by 25bp to 7.5%. Concomitantly the
reverse repo rate stands at 6.5% and Marginal Standing Facility (MSF) rate has
increased to 8.5%. RBI has also highlighted upward revision risks in inflation data
for April and May, considering the revision of March 2011 headline inflation to
9.7% from 9.1%. More concerning fact for the RBI has been the increase in core
inflation to 7.3% which was already well above its medium-term trend of 4.0%.
The increase in core inflation, according to the RBI, indicates more generalization
of inflationary pressures, rising wages and costs of service inputs are apparently
being passed on by producers. However, on the positive side, the spread between
primary articles inflation and manufactured products inflation has narrowed
further to 4.0% during May 2011 from as high as 13.1% in January 2011,
suggesting good portion of pass-through of raw material costs has already taken
place, in our view.
Don’t expect lending rates to be hiked across-the-board
The hike of 25bp in this policy review was much softer compared to the last policy
review wherein both the repo rate as well as the savings rate was increased by
50bp each. The banks have hiked base rate by 150-300bps since it was
introduced in July, 2010. The higher interest costs are, to an extent, restraining
credit growth but it still remains fairly high. Also with the credit off-take showing
initial signs of moderation and relatively smaller impact on cost of funds of the
repo rate hike as compared to a saving rate hike, we expect the banks to go slow
with lending rate hikes.
RBI steers clear of SLR and CRR hike
The liquidity conditions have been consistent with the RBI’s anti-inflationary stance
front. Borrowings through the LAF window have declined from an average of
~`84,000cr during 4QFY2011 to `41,000cr in 1QFY2012 (up to June 15), but
still are within the central bank’s target zone of +/- 1% of NDTL. On account of
the continued liquidity deficit in the system, the RBI has kept the harsher statutory
liquidity ratio (SLR) and cash reserve ratio (CRR) unchanged at 24.0% and 6.0%,
respectively. Going forward, also the central bank is targeting to maintain liquidity
conditions such that neither surplus liquidity (stoking inflationary pressures) nor
large deficit (choking off fund flows to productive sectors of the economy).
Unlike in China where the harsher reserve rates have been hiked to record levels
to cool down credit growth by hiking lending rates, Indian credit growth has been
much more restrained and liquidity has remained in the deficit mode since July,
2010. This has resulted into a status quo on both Cash Reserve Ratio (CRR) since
April 2010 and Statutory Liquidity Ratio (SLR) since December 2010.
Outlook
We believe that the lending rates are likely to peak at a lower level in this cycle
compared to the previous one as the inadequacy of forex inflows in this cycle is
likely to lead to a weaker demand momentum. We expect the lending rates to
peak at ~50bp from the current levels. Hence, we maintain our positive stance on
the banking sector, taking into account the still healthy credit demand and good
earnings visibility for large banks.
We continue to recommend selective stock-picking strategy and favour the large
private sector banks over the public ones. Our top picks include Axis Bank and
ICICI Bank from the private banking universe and SBI and Bank of Baroda from
the public sector banks.
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