RBI's annual report: Key highlights:: Edelweiss

Financial savings: Lowest in 23 years

·         Overall drop in household savings possibly reflecting slower income growth without corresponding drop in consumption.

·         Besides, there could also be likely shift in HH savings from financial to physical, partly due to regulatory changes in MF & Insurance industry and poor financial market conditions

·         In the coming year, declining consumption growth and relatively lower inflation (compared to previous years) should mean that household savings rate should stabalise around current levels.

·         However, one can see a shift back to financial savings from physical saving as the deposits would remain attractive at elevated interest rates and physical assets like housing may not be as attractive.

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Inflation: Persisting despite slowing growth

·         Historically, India has seen 7 episodes of high inflation  led by different reasons—oil shocks, currency devaluation, drought etc. Notably, once inflation turns high, it persists at higher levels for some time

·         In the current phase, structural changes in dietary patterns, MGNREGA exerting upward pressure on overall wage structure and mismatch in skills are keeping up price pressures.

·         In this backdrop, persistence of inflation (despite growth slowdown) has emerged as major challenge for monetary policy.

CAD: Widening led by oil and gold

·         In FY12, CAD  & trade deficit have widened to all time high of ~4.2% and ~10% of GDP respectively

·         Notably, net imports in oil & gold accounted for ~2/3rd of trade deficit.

Significant uptick in NPLs: However, stress analysis suggests resilience in testing times

·         In line with economic moderation, NPLs and restructuring jumped specifically in PSU banks. Private banks continued to show resilience with NPLs coming off

·         However, stress analysis carried out on macro factors like lower GDP, elevated inflation, and high fiscal deficit suggests limited dip in capital adequacy ratios

PSU banks to need common equity of INR1.4-1.5tn by FY18 to comply with Basel III norms

·         Assuming a uniform growth of 20% p.a. and ROA of 1.0-1.2%, PSU banks will need equity capital of INR1.4-1.5tn on top of internal accruals to comply with Basel III norms by FY18

·         Private banks will require around INR200-250bn by FY18

Credit-deposit ratio stretched: Moderation in investment activity to keep growth in check

·         Slower deposit growth given the deceleration in the reserve money keeping credit deposit stretched, an unusual phenomena during the phase of the cycle

·         However, slowdown in investment sanctions, specifically in infrastructure, will hamper credit growth in medium term

RBI’s annual report: Key highlights

Regards,

Edelweiss Research