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RBI Monetary Policy Review
Tackling inflation head-on
The RBI, in a surprise move, stepped up its anti-inflationary stance, raising both repo and
reverse repo rates by 50bp each to 8.0% and 7.0%, respectively, in its 1QFY2012 review
of the monetary policy. The Central Bank maintained status quo on cash reserve ratio
(CRR) and statutory liquidity ratio (SLR) at 6.0% and 24.0%, respectively. The street was
almost unanimously expecting a 25bp hike.
Policy tone remains hawkish: The tone of the overall policy statement remained hawkish
as, in RBI’s view, demand-side inflationary pressures have remained strong and growth
though beginning to moderate, is only gradually easing off. The RBI has revised upwards
its inflation forecast from 6.0% to 7.0% by March 2012 and at the same time has revised
downwards its projection for non-food bank credit and M3 to 18.0% (from 19.0%) and
15.5% (from 16.0%), respectively.
Outlook on interest rates: In our view, though the recent hike has extended the monetary
tightening cycle (a total of 11 repo rate hikes since March 2010), we believe we are close
to the peak of the current interest rate cycle. We do not expect material hike in deposit
rates and in overall cost of funds on account of the latest repo rate hike by the RBI as credit
off-take is itself showing signs of moderation on account of increased overall macroeconomic
risks and higher interest rates impacting demand. Moreover, we see cooling
global commodity prices, moderating food inflation (at two-year lows), weakening
domestic demand, slowing credit (down to sub-20% levels) and higher deposit mobilisation
as signals that the economy is close to the peak levels for both inflation and broader
interest rates. The key risk factor to our call is the longer-than-expected persistence of
global commodity and energy prices at higher levels.
Impact on banks: The tone of the policy suggests that the RBI is firmly focused on
anchoring inflation expectations even if it means that growth may be sacrificed to an
extent. Bankers have indicated that they may increase lending rates in the coming days,
which in our view could pose risks to credit growth and asset quality. That said, looking at
the liquidity situation in the banking system, we do not expect the deposit rates to go up
further as credit off-take has moderated considerably and deposit mobilisation has picked
up substantially. Hence, we do not expect material hike in deposit rates and in overall cost
of funds on account of the latest repo rate hike by the RBI. Our overall view remains that
broader lending and deposit rates may not go up materially from current levels, though
the prevalence of higher interest rates for a more extended period of time than earlier
anticipated poses near-term risks to GDP growth, credit growth and asset quality for
banks.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RBI Monetary Policy Review
Tackling inflation head-on
The RBI, in a surprise move, stepped up its anti-inflationary stance, raising both repo and
reverse repo rates by 50bp each to 8.0% and 7.0%, respectively, in its 1QFY2012 review
of the monetary policy. The Central Bank maintained status quo on cash reserve ratio
(CRR) and statutory liquidity ratio (SLR) at 6.0% and 24.0%, respectively. The street was
almost unanimously expecting a 25bp hike.
Policy tone remains hawkish: The tone of the overall policy statement remained hawkish
as, in RBI’s view, demand-side inflationary pressures have remained strong and growth
though beginning to moderate, is only gradually easing off. The RBI has revised upwards
its inflation forecast from 6.0% to 7.0% by March 2012 and at the same time has revised
downwards its projection for non-food bank credit and M3 to 18.0% (from 19.0%) and
15.5% (from 16.0%), respectively.
Outlook on interest rates: In our view, though the recent hike has extended the monetary
tightening cycle (a total of 11 repo rate hikes since March 2010), we believe we are close
to the peak of the current interest rate cycle. We do not expect material hike in deposit
rates and in overall cost of funds on account of the latest repo rate hike by the RBI as credit
off-take is itself showing signs of moderation on account of increased overall macroeconomic
risks and higher interest rates impacting demand. Moreover, we see cooling
global commodity prices, moderating food inflation (at two-year lows), weakening
domestic demand, slowing credit (down to sub-20% levels) and higher deposit mobilisation
as signals that the economy is close to the peak levels for both inflation and broader
interest rates. The key risk factor to our call is the longer-than-expected persistence of
global commodity and energy prices at higher levels.
Impact on banks: The tone of the policy suggests that the RBI is firmly focused on
anchoring inflation expectations even if it means that growth may be sacrificed to an
extent. Bankers have indicated that they may increase lending rates in the coming days,
which in our view could pose risks to credit growth and asset quality. That said, looking at
the liquidity situation in the banking system, we do not expect the deposit rates to go up
further as credit off-take has moderated considerably and deposit mobilisation has picked
up substantially. Hence, we do not expect material hike in deposit rates and in overall cost
of funds on account of the latest repo rate hike by the RBI. Our overall view remains that
broader lending and deposit rates may not go up materially from current levels, though
the prevalence of higher interest rates for a more extended period of time than earlier
anticipated poses near-term risks to GDP growth, credit growth and asset quality for
banks.
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