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The RBI raised its policy rate by 25bps to 8.50% but probably for the last time. The central
bank has said that assuming that inflation conforms to its expected trajectory, further action
on the policy rate will not be necessary. Separately, the central bank has also de-regulated
savings deposit rates – this will impact the blended cost of funds for banks but not by a
significant amount.
In terms of the macro picture, the RBI has downgraded its FY12 (fiscal year ending March
2012) GDP forecast from 8% to 7.6%. The downgrade is predicated on the softening activity
in manufacturing and services sectors. At the same time, it has maintained its year end
inflation target at 7% yoy with current pressures expected to ease from around the end of the
calendar 2011. There is still an element of caution in the monetary policy statement on
inflation - this arises from the impact of recent INR weakness on the landed cost of crude oil.
The RBI has also continued to express concern over the prospects of structurally elevated
inflation.
Our own expectation is that inflation will subside to slightly under 7% by March 2012 with
some support of a higher base effect. Even if inflation does overshoot this forecast, it can not
be labelled as a monetary or a demand pull phenomenon as it is coming against the
backdrop of softening growth/credit. We do think that the RBI is now likely done – the current
rate hike cycle has amounted to 525bps.
As mentioned above, the RBI has deregulated savings deposits. As per the new guidelines,
banks can (1) offer a uniform rate on savings deposit of up to INR100,000 and (2) allow
differential rates of interest on amounts above INR100,000. The rates can vary by amount
but not by customer. Currently, savings deposits carry a uniform rate of 4% regardless of
deposit rate.
This de-regulation has two implications: (1) the transmission from policy to bank deposit
rates will be enhanced considering that savings deposits are around a quarter of overall bank
deposits and (2) the blended cost of deposits for banks will rise. The increase is unlikely to
be significant according to our Indian banks analyst Jatinder Agarwal. This is because the
average size of savings bank deposits in India is around INR25,000. Assuming that these
deposit costs should not exceed interbank rates and the cost of operating these deposits is
2%, savings deposit rates can realistically increase from 4% to 6%. Further larger public
sector banks which have a comfortable loan-deposit ratio are unlikely to start a rates war.
Overall, the impact may not be significant.
Rates have reacted positively to the policy statement. Going forward, the direction of bond yields
will be dependent on the degree of fiscal slippage. In this context, the RBI view is a sober one,
indeed. Rising subsidies, slowing tax collections and YTD trends point to significant slippage in
the fiscal accounts. Our own estimates suggest that the full year deficit will be around 5.4% of
GDP instead of the government forecast of 4.6%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The RBI raised its policy rate by 25bps to 8.50% but probably for the last time. The central
bank has said that assuming that inflation conforms to its expected trajectory, further action
on the policy rate will not be necessary. Separately, the central bank has also de-regulated
savings deposit rates – this will impact the blended cost of funds for banks but not by a
significant amount.
In terms of the macro picture, the RBI has downgraded its FY12 (fiscal year ending March
2012) GDP forecast from 8% to 7.6%. The downgrade is predicated on the softening activity
in manufacturing and services sectors. At the same time, it has maintained its year end
inflation target at 7% yoy with current pressures expected to ease from around the end of the
calendar 2011. There is still an element of caution in the monetary policy statement on
inflation - this arises from the impact of recent INR weakness on the landed cost of crude oil.
The RBI has also continued to express concern over the prospects of structurally elevated
inflation.
Our own expectation is that inflation will subside to slightly under 7% by March 2012 with
some support of a higher base effect. Even if inflation does overshoot this forecast, it can not
be labelled as a monetary or a demand pull phenomenon as it is coming against the
backdrop of softening growth/credit. We do think that the RBI is now likely done – the current
rate hike cycle has amounted to 525bps.
As mentioned above, the RBI has deregulated savings deposits. As per the new guidelines,
banks can (1) offer a uniform rate on savings deposit of up to INR100,000 and (2) allow
differential rates of interest on amounts above INR100,000. The rates can vary by amount
but not by customer. Currently, savings deposits carry a uniform rate of 4% regardless of
deposit rate.
This de-regulation has two implications: (1) the transmission from policy to bank deposit
rates will be enhanced considering that savings deposits are around a quarter of overall bank
deposits and (2) the blended cost of deposits for banks will rise. The increase is unlikely to
be significant according to our Indian banks analyst Jatinder Agarwal. This is because the
average size of savings bank deposits in India is around INR25,000. Assuming that these
deposit costs should not exceed interbank rates and the cost of operating these deposits is
2%, savings deposit rates can realistically increase from 4% to 6%. Further larger public
sector banks which have a comfortable loan-deposit ratio are unlikely to start a rates war.
Overall, the impact may not be significant.
Rates have reacted positively to the policy statement. Going forward, the direction of bond yields
will be dependent on the degree of fiscal slippage. In this context, the RBI view is a sober one,
indeed. Rising subsidies, slowing tax collections and YTD trends point to significant slippage in
the fiscal accounts. Our own estimates suggest that the full year deficit will be around 5.4% of
GDP instead of the government forecast of 4.6%.
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