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CRR cut positive, GDP and credit growth cut negative…
Key statements….
ƒ The RBI cut the CRR by 50 bps to 5.5% from 6% effective from
January 28, 2012. Release of | 32,000 crore in liquidity expected
ƒ The central bank has kept repo rate unchanged at 8.5% as expected.
(refer ‘Monthly Inflation’ update dated January 17, 2012)
ƒ GDP growth target has been revised to 7% from 7.6% for FY12
ƒ RBI has revised downwards credit growth estimate to 16% from
18% as expected
ƒ Inflation moderated sharply to 7.47% from 9.11% in November 2011
and 9.45% in December last year but the RBI remained cautious of
upside risks and maintained its year end inflation target of 7%
ƒ M3 growth projection of 15.5% has been maintained as it has
already moderated to 15.6% as at end December 2011
ƒ Borrowings under the LAF window rose to | 120,000 crore during
January 2012 from around | 49,000 crore during April-October 2011.
OMO operations conducted to the tune of | 70,000 crore by RBI
As indicated by RBI, stance of monetary policy is…
ƒ Maintain an interest rate environment to contain inflation and anchor
inflation expectations
ƒ Manage liquidity to ensure that it remains in moderate deficit,
consistent with effective monetary transmission
ƒ Respond to increasing downside risks to growth
Our view
We believe the CRR cut of 50 bps providing | 32000 crore of liquidity to
the system should help reduce borrowings under the LAF window by
banks to under | 100,000 crore. Also, as the RBI has indicated of future
policy actions to be on the reversal side, there should be moderation in
short-term rates (CPs and CDs) to the tune of 10-15 bps. The cut should
also benefit banks as they start earning interest on released CRR portion.
We believe credit growth target revision to 16% from 18% is as
anticipated. Many large banks like SBI, PNB, etc. have already lowered
their credit growth targets to the 16-17% range. Hence, the impact of the
same seems to be priced in banking stock prices. The concern, however,
arises on visibility of credit growth post FY12 as the economy may take a
longer time to revive as per RBI statements “Looking ahead to 2012-13,
while a formal projection will be made in the Annual Policy Statement in
April, the Reserve Bank’s baseline scenario is that the economy will
exhibit a modest recovery, with growth being slightly faster than that
during the current year. “
As observed, the RBI is citing increasing risk to GDP growth. However, till
inflation numbers come within the comfort zone, we believe there may
not be a cut in policy rates till then.
As per RBI’s document, food inflation has moderated more than
anticipated on account of a sharp drop in vegetable prices. This benefit
has, however, been offset to a large extent by the lower-than-expected
moderation in non-food manufactured products inflation. Fuel inflation
remains well above double digits. Keeping in view the expected
moderation in non-food manufactured products inflation, domestic
supply factors and global trends in commodity prices, the baseline
projection for WPI inflation has been retained at 7%. There are even
upside risks due to elevated crude oil prices and the lingering effect of a
depreciating rupee as stated by Mr Subbarao.
With H1FY12 GDP growth at 7.3%, there is expectation of further declines
in Q3 and Q4 growth as slowdown aggravates leading to RBI’s revision.
A significant downgrade in the growth projection would normally have
been accompanied by a downward revision in the inflation projection.
This has been prevented from happening because -
a) First, rupee depreciation has been feeding into core inflation, delaying
the adjustment of inflation to slower growth
b) Second, very importantly, suppressed inflation in petroleum product
and coal prices remains quite significant. While a rationalisation of prices
is welcome for a variety of well known reasons, it will impact observed
inflation in the short- term.
We maintain our view of overweight private sector banks and neutral on
public sector banks on account of slower growth and risk of higher NPA’s.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
CRR cut positive, GDP and credit growth cut negative…
Key statements….
ƒ The RBI cut the CRR by 50 bps to 5.5% from 6% effective from
January 28, 2012. Release of | 32,000 crore in liquidity expected
ƒ The central bank has kept repo rate unchanged at 8.5% as expected.
(refer ‘Monthly Inflation’ update dated January 17, 2012)
ƒ GDP growth target has been revised to 7% from 7.6% for FY12
ƒ RBI has revised downwards credit growth estimate to 16% from
18% as expected
ƒ Inflation moderated sharply to 7.47% from 9.11% in November 2011
and 9.45% in December last year but the RBI remained cautious of
upside risks and maintained its year end inflation target of 7%
ƒ M3 growth projection of 15.5% has been maintained as it has
already moderated to 15.6% as at end December 2011
ƒ Borrowings under the LAF window rose to | 120,000 crore during
January 2012 from around | 49,000 crore during April-October 2011.
OMO operations conducted to the tune of | 70,000 crore by RBI
As indicated by RBI, stance of monetary policy is…
ƒ Maintain an interest rate environment to contain inflation and anchor
inflation expectations
ƒ Manage liquidity to ensure that it remains in moderate deficit,
consistent with effective monetary transmission
ƒ Respond to increasing downside risks to growth
Our view
We believe the CRR cut of 50 bps providing | 32000 crore of liquidity to
the system should help reduce borrowings under the LAF window by
banks to under | 100,000 crore. Also, as the RBI has indicated of future
policy actions to be on the reversal side, there should be moderation in
short-term rates (CPs and CDs) to the tune of 10-15 bps. The cut should
also benefit banks as they start earning interest on released CRR portion.
We believe credit growth target revision to 16% from 18% is as
anticipated. Many large banks like SBI, PNB, etc. have already lowered
their credit growth targets to the 16-17% range. Hence, the impact of the
same seems to be priced in banking stock prices. The concern, however,
arises on visibility of credit growth post FY12 as the economy may take a
longer time to revive as per RBI statements “Looking ahead to 2012-13,
while a formal projection will be made in the Annual Policy Statement in
April, the Reserve Bank’s baseline scenario is that the economy will
exhibit a modest recovery, with growth being slightly faster than that
during the current year. “
As observed, the RBI is citing increasing risk to GDP growth. However, till
inflation numbers come within the comfort zone, we believe there may
not be a cut in policy rates till then.
As per RBI’s document, food inflation has moderated more than
anticipated on account of a sharp drop in vegetable prices. This benefit
has, however, been offset to a large extent by the lower-than-expected
moderation in non-food manufactured products inflation. Fuel inflation
remains well above double digits. Keeping in view the expected
moderation in non-food manufactured products inflation, domestic
supply factors and global trends in commodity prices, the baseline
projection for WPI inflation has been retained at 7%. There are even
upside risks due to elevated crude oil prices and the lingering effect of a
depreciating rupee as stated by Mr Subbarao.
With H1FY12 GDP growth at 7.3%, there is expectation of further declines
in Q3 and Q4 growth as slowdown aggravates leading to RBI’s revision.
A significant downgrade in the growth projection would normally have
been accompanied by a downward revision in the inflation projection.
This has been prevented from happening because -
a) First, rupee depreciation has been feeding into core inflation, delaying
the adjustment of inflation to slower growth
b) Second, very importantly, suppressed inflation in petroleum product
and coal prices remains quite significant. While a rationalisation of prices
is welcome for a variety of well known reasons, it will impact observed
inflation in the short- term.
We maintain our view of overweight private sector banks and neutral on
public sector banks on account of slower growth and risk of higher NPA’s.
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