RBI Monetary Policy Update (Feb 2015) :: ICICI Securities, report

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WHAT’S CHANGED… CRR...........................................................................................................Unchanged at 4% Repo Rate ............................................................................................Unchanged at 7.25% SLR ..........................................................................................Changed from 22% to 21.5% Strict watch on Budget for further rate cut The RBI maintained status quo with no change in rates as expected. The RBI clearly said that as it had committed, in public statements, to initiate a change in the monetary policy stance as soon as incoming data permitted, it cut the policy rate by 25 bps on January 15, 2015. Accordingly, the governor this time hinted that a future rate cut can happen immediately post the Budget analysis. In case of a strong fiscal guidance in the Budget, we can see an intermittent rate cut of another 25 bps even prior to the next policy meet in April 2015. Key policy statements…. ƒ Repo rate kept unchanged at 7.75% with CRR maintained at 4% ƒ SLR was reduced by 50 bps to 21.5% as a positive surprise. The RBI expects this headroom to increase bank’s lending to productive sectors on competitive terms to support investment and growth ƒ The central estimate for real GDP growth in 2015-16 is expected to rise to 6.5% with risks broadly balanced at this point. Projection of GDP growth for FY15 was retained at 5.5% on the assumption of a normal monsoon and no adverse supply/financial shocks ƒ CPI inflation forecast to reach 6% by January 2016 ƒ The eligibility limit for foreign exchange remittances was raised to US$250000 per person per year from US$125000 as on June 2014 ƒ RBI allowed banks in February 2014 to reverse the excess provision on sale of NPAs (post February 26, 2014) to securitisation companies/reconstruction companies when the cash received (by way of initial sale consideration and/or redemption of security receipts/pass-through certificates) is higher than the net book value (NBV) of the asset. Now, the same has been extended for assets sold before February 26, 2014 leading to banks having a larger pool of ARC sale portfolio provisions reversal adding to bottomline Our view We believe the SLR cut will further improve liquidity of banks and in effect help improve margins. However, the unexpected cut has led 10 year Gsec yields to harden to 7.72% vs. 7.65% a day before. The deferral of increase in foreign investors (FPI) limit for investment in government securities from current $30 billion (25+5) and allowing just re-investment of coupons in the meanwhile, also led to an upward pressure on yields. We believe the 7.5-7.75% range will continue in the near term, unless the Budget surprises negatively. Though effective rates in system – via money market, G-sec rates and corporate bonds have declined substantially, a reduction in bank base rates is yet not seen. Post CPI levels remaining under target range and also below January 2016 target of 6%, the RBI is awaiting data on fiscal deficit in the annual Budget. We expect another 25 bps repo rate cut post the Budget day.

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http://content.icicidirect.com/mailimages/IDirect_RBIActions_Feb15.pdf