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High inflation – Not allowing the pause…
Key statements….
• Hikes repo rate by 25 bps to 8.25% with immediate effect and,
thereby, reverse repo rate has increased by 25 bps to 7.25%
• Keeps bank rate and CRR unchanged at 6.0%
• Marginal standing facility (MSF) rate for banks increased to 9.25%
• Inflation (August - WPI) at 9.78% and consistently high, remains
above RBI’s comfort zone
• Downside risk to July estimate of FY12 GDP growth of 8%
remains
• M3 growth at 16.7% in August was higher than projected 15.5%
• Credit growth at 20.1% YoY remains above the projected 18%
target
• Developments in the global economy over the past few weeks are
a matter of serious concern and recovery may take longer
RBI’s view on inflation…
• To continue with anti-inflationary stance and food inflation not
seen as temporary phenomenon as it is moving north in spite of
normal monsoons
• Inflationary pressures are expected to ease towards the later part
of 2011-12. Stabilisation of energy prices and moderating
domestic demand should facilitate this process
• Rupee depreciation may have adverse implications for inflation
• Current administered electricity prices are yet to reflect increase
in input prices
Impact of policy action…
Banks have transmitted the rate hikes in the near past as the modal base
rate rose from 10.25% in July to 10.75% in August. However, the full
impact of initial rate hikes is expected to be felt faster now due to the lag.
This should tone down demand side inflation gradually. With a slowdown
setting in and GDP growth expected to be at ~7.5%, we believe
incremental NPA pressure will remain high for the banks.
We expect rate hikes to have peaked. However, higher interest rates are
likely to stay in the system for a fair amount of time leading to the banking
sector facing either credit contraction or increased defaults or both. We
continue to prefer banks with strong liability franchise and strong asset
quality like HDFC Bank from the private banking space and Bank of
Baroda from the PSB space.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
High inflation – Not allowing the pause…
Key statements….
• Hikes repo rate by 25 bps to 8.25% with immediate effect and,
thereby, reverse repo rate has increased by 25 bps to 7.25%
• Keeps bank rate and CRR unchanged at 6.0%
• Marginal standing facility (MSF) rate for banks increased to 9.25%
• Inflation (August - WPI) at 9.78% and consistently high, remains
above RBI’s comfort zone
• Downside risk to July estimate of FY12 GDP growth of 8%
remains
• M3 growth at 16.7% in August was higher than projected 15.5%
• Credit growth at 20.1% YoY remains above the projected 18%
target
• Developments in the global economy over the past few weeks are
a matter of serious concern and recovery may take longer
RBI’s view on inflation…
• To continue with anti-inflationary stance and food inflation not
seen as temporary phenomenon as it is moving north in spite of
normal monsoons
• Inflationary pressures are expected to ease towards the later part
of 2011-12. Stabilisation of energy prices and moderating
domestic demand should facilitate this process
• Rupee depreciation may have adverse implications for inflation
• Current administered electricity prices are yet to reflect increase
in input prices
Impact of policy action…
Banks have transmitted the rate hikes in the near past as the modal base
rate rose from 10.25% in July to 10.75% in August. However, the full
impact of initial rate hikes is expected to be felt faster now due to the lag.
This should tone down demand side inflation gradually. With a slowdown
setting in and GDP growth expected to be at ~7.5%, we believe
incremental NPA pressure will remain high for the banks.
We expect rate hikes to have peaked. However, higher interest rates are
likely to stay in the system for a fair amount of time leading to the banking
sector facing either credit contraction or increased defaults or both. We
continue to prefer banks with strong liability franchise and strong asset
quality like HDFC Bank from the private banking space and Bank of
Baroda from the PSB space.
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