Monetary Policy Update (September 2012) ICICI Securities,

Maintaining adequate liquidity seems the agenda…
The repo and reverse repo rates were kept unchanged as expected but
the CRR cut of 25 bps to 4.5% came as a positive surprise. If we analyse
the last two policy actions of SLR cut by 1% and export credit benefit,
they were all ensuring more liquidity being provided in the system.
CRR cut should release ~| 17000 crore of funds for banks to effect
lending/invest and is effective the fortnight beginning September 22,
2012. The banking sector will benefit on the margins front as CRR funds
kept with RBI, that are not earning anything, will start earning some
return. Wholesale funded banks like Yes Bank, Axis Bank, Indian Overseas
Bank, Corporation Bank, etc. may benefit slightly more than high CASA
banks. However, as 25 bps is too small, the impact on profitability level
on | 17000 crore release can be ~| 950 crore post tax for banking
industry as a whole.

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RBI has highlighted its concern on inflation
‘In the recent hike in diesel prices/rationalisation of LPG subsidy the passthrough to administered prices remains incomplete. International crude
prices are vulnerable to being driven up further by global liquidity. Core
inflation pressures remained firm with non-food manufactured products
inflation inching up from 5.1% in April to 5.6% in August and the
momentum indicator remaining elevated. Even as demand pressures
moderate, supply constraints and rupee depreciation are imparting
pressures on prices, rendering them sticky’


But still it seems RBI’s stance is shifting towards growth…
Growth risks have increased, inflation risks remain. Mitigating growth
risks and taking the economy to a higher sustainable growth trajectory
require concerted policy action across a range of domains, a process to
which last week’s actions made a  significant contribution. Monetary
policy also has an important role in supporting the growth revival.
However, in the current situation, persistent inflationary pressures
alongside risks emerging from twin deficits – current account deficit and
fiscal deficit - constrain a stronger response of monetary policy to growth
risks.


Yields for 10 year G-Secs surged as high as 8.17% post announcement
from 8.11% at the start of the day. Due to the CRR cut, additional liquidity
will come into the system defying the expected OMO infusions bond
market was expecting.
Being a mid- quarterly review, the RBI remained silent on its estimates of
other key indicators. We believe the RBI may start considering a rate cut
in monetary policies in the near future, factoring in lower growth with
inflation remaining sticky around 7%.
We believe the October monetary policy may see further revisions to GDP
growth with even credit growth on the lower side.