Economy Update - RBI surprises with 75bps CRR cut::Emkay PDF link

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Economy Update RBI surprises with 75bps CRR cut In a much bolder step, RBI today has reduced the CRR rate by a steep 75bps to 4.75% effective 10th March, 2012 ·      While the CRR cut was much along our expected lines (see our recent strategy report titled “India strategy - Early to write off the downgrade cycle”) the quantum i.e. a 75bps cut (against our expectations of 50bps) has come in as a big +ve surprise ·      Through 50bps CRR cut in its third quarter monetary policy review + on-going OMO operations since Nov, 2011, RBI had already infused liquidity to the tune of Rs1.5tn (2.4% of NDTL) into the system. The recent CRR cut would further infuse liquidity by Rs480bn ·      The timing of CRR cut too is appreciated as we are a notch away from advance tax payments dues on 15th March. With this much expected move, we expect the quarterly monetary policy to be non-eventful ·      A prolonged period of substantially higher WPI inflation had restricted the central bank from easing its monetary stance. This in-turn had affected the non-food credit growth which remained fragile at 15.5% as at Feb 10th, 2012 ·      Also, in the back drop of moderating GDP growth (Q3FY12 stood at 6.1%), dismal IIP growth (1.8% for Dec’2011) and easing WPI Inflation (Jan’12 stood at 6.5%) we had anticipated for a strong case of CRR cut ·      We do not expect banks to immediately reduce their lending rates as they would like to wait for any reduction in policy rates. Resultantly, this will have positive impact on bank NIMs to the tune of ~7-10bps

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