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Repo rate unchanged; markets cheerful on the CRR reduction
Event: RBI reduces CRR by 50bps, slashes FY12 GDP growth forecast to 7%
RBI announced a CRR reduction by 50bps, w.e.f 28th January, implying INR 320bn primary liquidity infusion into the banking system while reducing the FY2012 GDP forecast to 7.0% from 7.6%; Key takeaways from the RBI policy meet on the 24th January:
RBI cuts CRR 50 bps to 5.50%, effective Jan 28
CRR cut to infuse 320 bln rupees into banks
Repo rate kept unchanged at 8.50%
FY12 GDP growth projection cut to 7.0% from 7.6% earlier
March-end inflation projection retained at 7.0%
FY12 non-food credit growth projection cut to 16.0%
Premature to reduce policy rates on current inflation
Balance of stance has now shifted to growth
Policy stance has to be more sensitive to growth risks
Elevated inflationary pressure plays the villain again
Investors should now focus on the inflation progression vis-à-vis growth indicators before the next RBI meet scheduled in March, in view of the emphasis placed on inflation containment by the RBI. Repo rate reduction would ideally occur in the event of core inflation moderating below the RBI comfort zone of 5%-5.5% on a more sustainable basis. The RBI indicated CRR reduction may be followed by repo rate reduction, provided Inflation shows signs of sustainable moderation. Furthermore, the RBI maintained its WPI inflation forecast of 7% for March 2012 considering the seasonality element in December’s food product inflation softening and a rather uninspiring moderation in non-food manufacturing WPI inflation in December. Moreover, RBI has revised downwards the non-food credit growth target to 16% from 18% in spite of the additional liquidity boost from the CRR cut, implying economic growth deceleration and more cautious credit growth stance adopted by banks.
MSTL view: CRR cut without repo rate easing may add to NIM traction
Repo rate, as expected was kept unchanged at 8.5% by the RBI but the balance of RBI stance has now clearly shifted to pro-growth while aiming to keep inflation under control. CRR reduction was widely anticipated as there is a build-up of excess liquidity burden on the banking system given the heightened possibility of fiscal deficit slipping beyond the targeted 4.6% for FY2012. CRR cut by the RBI infuses an additional INR320bn of primary liquidity into banks. This may now induce banks to lower lending rates to aid credit expansion, however, without repo rate reduction in sight, net interest margins (NIMs) would broadly face some tension from lending rate easing by banks in the near term, in our view. The inflationary pressure persists, augmented by rising commodity prices and the threat of fiscal deficit overshooting the RBI guidance, so the RBI’s dilemma of growth/inflation would continue in the next policy meet also, in our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Repo rate unchanged; markets cheerful on the CRR reduction
Event: RBI reduces CRR by 50bps, slashes FY12 GDP growth forecast to 7%
RBI announced a CRR reduction by 50bps, w.e.f 28th January, implying INR 320bn primary liquidity infusion into the banking system while reducing the FY2012 GDP forecast to 7.0% from 7.6%; Key takeaways from the RBI policy meet on the 24th January:
RBI cuts CRR 50 bps to 5.50%, effective Jan 28
CRR cut to infuse 320 bln rupees into banks
Repo rate kept unchanged at 8.50%
FY12 GDP growth projection cut to 7.0% from 7.6% earlier
March-end inflation projection retained at 7.0%
FY12 non-food credit growth projection cut to 16.0%
Premature to reduce policy rates on current inflation
Balance of stance has now shifted to growth
Policy stance has to be more sensitive to growth risks
Elevated inflationary pressure plays the villain again
Investors should now focus on the inflation progression vis-à-vis growth indicators before the next RBI meet scheduled in March, in view of the emphasis placed on inflation containment by the RBI. Repo rate reduction would ideally occur in the event of core inflation moderating below the RBI comfort zone of 5%-5.5% on a more sustainable basis. The RBI indicated CRR reduction may be followed by repo rate reduction, provided Inflation shows signs of sustainable moderation. Furthermore, the RBI maintained its WPI inflation forecast of 7% for March 2012 considering the seasonality element in December’s food product inflation softening and a rather uninspiring moderation in non-food manufacturing WPI inflation in December. Moreover, RBI has revised downwards the non-food credit growth target to 16% from 18% in spite of the additional liquidity boost from the CRR cut, implying economic growth deceleration and more cautious credit growth stance adopted by banks.
MSTL view: CRR cut without repo rate easing may add to NIM traction
Repo rate, as expected was kept unchanged at 8.5% by the RBI but the balance of RBI stance has now clearly shifted to pro-growth while aiming to keep inflation under control. CRR reduction was widely anticipated as there is a build-up of excess liquidity burden on the banking system given the heightened possibility of fiscal deficit slipping beyond the targeted 4.6% for FY2012. CRR cut by the RBI infuses an additional INR320bn of primary liquidity into banks. This may now induce banks to lower lending rates to aid credit expansion, however, without repo rate reduction in sight, net interest margins (NIMs) would broadly face some tension from lending rate easing by banks in the near term, in our view. The inflationary pressure persists, augmented by rising commodity prices and the threat of fiscal deficit overshooting the RBI guidance, so the RBI’s dilemma of growth/inflation would continue in the next policy meet also, in our view.
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