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India Equity Research Reports, IPO and Stock News
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Hikes repo rate by 25bp to 8.25%
Consequently, reverse repo rate stands adjusted at 7.25% and MSF rate at 9.25%
Keeps SLR and CRR unchanged at 24.0% and 6.0%, respectively
The Reserve Bank of India (RBI) in its mid-quarterly monetary policy review persevered
with its anti-inflationary stance and raised repo rate for the 12th time since March 2010.
The Central Bank maintained status quo on CRR and SLR at 6.0% and 24.0%,
respectively. The policy action was in-line with street’s expectations. The overall tone of
the monetary policy remained hawkish, with the expected outcome of the monetary
policy solely focused on containing inflation and anchoring inflationary expectations.
Key takeaways from the policy statement
On the growth front: The RBI has noted that risks to growth projections are on the
downside as the global economy is slowing down and domestic demand trends have
slowed down as well. The RBI has also stated that though IIP growth in July fell sharply,
but excluding volatile capital goods, IIP growth was better than that recorded in June.
Corporate margins, according to the RBI, moderated sequentially across several sectors
in 1QFY2012; however, barring a few sectors, significant pass-through of rising input
costs (pricing power) is still visible.
On inflationary pressures: In RBI’s view, inflation remains high, generalised and much
above the comfort zone. After slight moderation in July, non-food manufactured
products inflation rose again in August, suggesting continuing demand pressures.
Global crude oil prices have remained elevated despite weakening global recovery.
Moreover, there is still an element of suppressed inflation. Though global oil prices have
moderated, the pass-through to domestic prices remains incomplete. Also, current
administered electricity prices are yet to reflect increased input prices, even as many
states have initiated increases. Food inflation is near double-digit levels, underlining the
fact that it is being driven by structural demand-supply imbalances and cannot be
dismissed as a temporary phenomenon. Inflation momentum, reflected in the
de-seasonalised sequential monthly data, persists, according to the RBI.
Outlook on inflation and policy rates
Looking at the remaining pass-through of oil and electricity prices, we expect WPI
inflation to remain sticky above 9% levels at least until December 2011, which is likely
to force the RBI to persevere with its hawkish stance to anchor inflationary expectations.
Hence, taking into account our forecasted inflation trajectory and the RBI’s unequivocal
guidance (that in the near term, unless inflation actually shows a clear declining trend,
its stance will not change), we do not rule out further rate hikes up to January 2012
However, from January 2012, we believe inflation is likely to start trending
downwards, barring any major negative surprises on the global commodity price
front. In fact, rising global growth concerns and declining fiscal stimulus measures
in developed economies are likely to keep commodity and energy prices in check
in the short term. Moreover, in our view, annualised inflation in manufactured
products is showing signs of cooling (5% in August, 3.6% on a three-month
annualised basis) – an indication that demand-side pressures are not at runaway
levels.
Hence, from January 2012 at the latest, we see a meaningful case for the RBI to
take a pause, especially considering the signs of slowdown on the domestic growth
front, evident from slowing GDP growth rates, tepid IIP growth, moderating trend
in PMI, declining vehicle sales, flat cement dispatches and expected moderation in
export growth.
Impact on banks
Considering the improvement in systemic liquidity (moderation in credit offtake
and substantial rise in deposit mobilisation), we do not expect deposit rates to go
up materially from the current levels. In fact, over the past six months, there have
not been meaningful hikes in deposit rates and the impact of the past increases
has largely flown through bank P&Ls (refer Exhibit 1). Hence, unlike six months
ago, when tight liquidity conditions were a major factor in pushing up lending
rates, at present we see the upward bias to lending rates arising only from the
monetary policy front, which too we believe is close to peak levels on account of
the above-mentioned reasons.
That said, further lending rate hikes are likely to moderate the already slowing
trend in credit demand; but more than that, the key concern for the banking sector
would be the increase in asset-quality risks. Hence, we prefer banks with a more
conservative asset-quality profile, especially amongst mid caps (i.e. relatively lower
yield on advances and switchover to system-based recognition system nearly
complete) – this includes banks such as Syndicate Bank, Bank of Maharashtra and
United Bank of India. Also, from a medium-term perspective, we continue to prefer
large private banks with a strong structural investment case (within which we prefer
Axis Bank and ICICI Bank from a valuation perspective).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hikes repo rate by 25bp to 8.25%
Consequently, reverse repo rate stands adjusted at 7.25% and MSF rate at 9.25%
Keeps SLR and CRR unchanged at 24.0% and 6.0%, respectively
The Reserve Bank of India (RBI) in its mid-quarterly monetary policy review persevered
with its anti-inflationary stance and raised repo rate for the 12th time since March 2010.
The Central Bank maintained status quo on CRR and SLR at 6.0% and 24.0%,
respectively. The policy action was in-line with street’s expectations. The overall tone of
the monetary policy remained hawkish, with the expected outcome of the monetary
policy solely focused on containing inflation and anchoring inflationary expectations.
Key takeaways from the policy statement
On the growth front: The RBI has noted that risks to growth projections are on the
downside as the global economy is slowing down and domestic demand trends have
slowed down as well. The RBI has also stated that though IIP growth in July fell sharply,
but excluding volatile capital goods, IIP growth was better than that recorded in June.
Corporate margins, according to the RBI, moderated sequentially across several sectors
in 1QFY2012; however, barring a few sectors, significant pass-through of rising input
costs (pricing power) is still visible.
On inflationary pressures: In RBI’s view, inflation remains high, generalised and much
above the comfort zone. After slight moderation in July, non-food manufactured
products inflation rose again in August, suggesting continuing demand pressures.
Global crude oil prices have remained elevated despite weakening global recovery.
Moreover, there is still an element of suppressed inflation. Though global oil prices have
moderated, the pass-through to domestic prices remains incomplete. Also, current
administered electricity prices are yet to reflect increased input prices, even as many
states have initiated increases. Food inflation is near double-digit levels, underlining the
fact that it is being driven by structural demand-supply imbalances and cannot be
dismissed as a temporary phenomenon. Inflation momentum, reflected in the
de-seasonalised sequential monthly data, persists, according to the RBI.
Outlook on inflation and policy rates
Looking at the remaining pass-through of oil and electricity prices, we expect WPI
inflation to remain sticky above 9% levels at least until December 2011, which is likely
to force the RBI to persevere with its hawkish stance to anchor inflationary expectations.
Hence, taking into account our forecasted inflation trajectory and the RBI’s unequivocal
guidance (that in the near term, unless inflation actually shows a clear declining trend,
its stance will not change), we do not rule out further rate hikes up to January 2012
However, from January 2012, we believe inflation is likely to start trending
downwards, barring any major negative surprises on the global commodity price
front. In fact, rising global growth concerns and declining fiscal stimulus measures
in developed economies are likely to keep commodity and energy prices in check
in the short term. Moreover, in our view, annualised inflation in manufactured
products is showing signs of cooling (5% in August, 3.6% on a three-month
annualised basis) – an indication that demand-side pressures are not at runaway
levels.
Hence, from January 2012 at the latest, we see a meaningful case for the RBI to
take a pause, especially considering the signs of slowdown on the domestic growth
front, evident from slowing GDP growth rates, tepid IIP growth, moderating trend
in PMI, declining vehicle sales, flat cement dispatches and expected moderation in
export growth.
Impact on banks
Considering the improvement in systemic liquidity (moderation in credit offtake
and substantial rise in deposit mobilisation), we do not expect deposit rates to go
up materially from the current levels. In fact, over the past six months, there have
not been meaningful hikes in deposit rates and the impact of the past increases
has largely flown through bank P&Ls (refer Exhibit 1). Hence, unlike six months
ago, when tight liquidity conditions were a major factor in pushing up lending
rates, at present we see the upward bias to lending rates arising only from the
monetary policy front, which too we believe is close to peak levels on account of
the above-mentioned reasons.
That said, further lending rate hikes are likely to moderate the already slowing
trend in credit demand; but more than that, the key concern for the banking sector
would be the increase in asset-quality risks. Hence, we prefer banks with a more
conservative asset-quality profile, especially amongst mid caps (i.e. relatively lower
yield on advances and switchover to system-based recognition system nearly
complete) – this includes banks such as Syndicate Bank, Bank of Maharashtra and
United Bank of India. Also, from a medium-term perspective, we continue to prefer
large private banks with a strong structural investment case (within which we prefer
Axis Bank and ICICI Bank from a valuation perspective).
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