Monetary policy: To speed up base rate cuts :: Nomura Research

Please Share::

�� India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details ��

��

-->
RBI has maintained the status quo on rates/reserve requirements, which

was on expected lines, but the RBI has indicated moving banks to setting

the base rate on the marginal cost of funds rather than the average cost of

funds, which will likely accelerate the pace of monetary transmission. While

the move to marginal cost of funds will likely be in a phased manner, the

transitory negative impact of lower rates on bank margins, especially for

corporate banks, will get accelerated, though in the long run lower rates will

be credit positive. Given that banks have cut deposit rates by 25-50bps in

the last 6-9 months, we would expect them to accelerate base rate cuts now.

This will have a negative impact on bank margins, especially for PSUs, in

the interim, but as the NIM impact will be transitory, we think investors

should look through the negative NIM impact. We maintain our positive view

on corporate banks/PSUs in spite of a weak 4Q expected, as valuations look

reasonable after the recent correction.

Status quo on rates/reserve requirements:

 RBI maintained repo rates and SLR/CRR levels – This was on expected

lines, as RBI would want to look through the impact of unseasonal rains on

inflation before moving on repo rates, and with ample liquidity in the

system, there was no fundamental reason to lower the CRR (the market

expected some cuts).

Accelerate pace of monetary transmission - move to marginal cost of

funds to set base rate

 RBI indicated a need for faster transmission by banks through base rate

cuts, by (1) Indicating slower transmission as one of the top reasons for

holding up on policy rates, (2) Indicating a plan to move banks from

average cost of funds to marginal cost of funds when setting the base rate.

 Move to marginal cost of funds for base rate setting: Most banks

currently set the base rate on average cost of funds and that has

prevented banks from cutting base rates, despite cutting deposit rates by

25-50ps in the last 6-9 months. By moving banks to set the base rate on

marginal cost of funds, the RBI intends to quicken the pace of monetary

transmission.

 Faster base rate action now: We believe that most banks would have cut

the base rate in 1Q FY16F as average cost of funds was moderating given

deposit rate cuts over the last 6-9 months. This move by RBI will lead to

front loading of base rate cuts in April-15 itself, and will ensure faster

transmission going forward.

 Near term negative on margins: We believe bank margins, especially for

corporate/PSU banks, will be negatively impacted, due to faster

transmission in a falling rate environment. For most PSUs and corporate

banks like Axis/ICICI, 80-85% of their loans are floating in nature and will

re-price lower on base rate cuts. The impact on retail private banks will be

lower, given 40-50% of the loan book is fixed in nature.