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RBI Monetary Policy Review
RBI Monetary Policy Review
RBI Monetary Policy Review
Vaibhav Agrawal
022 3935 7800 Ext: 6808 vaibhav.agrawal@angelbroking.com
Shrinivas Bhutda
022 3935 7800 Ext: 6845 shrinivas.bhutda@angelbroking.com
Varun Varma
022 3935 7800 Ext: 6847 varun.varma@angelbroking.com
Factors which suggest that we are closer to peak of the current interest rate cycle
Credit demand slowing, deposit mobilization picks up strongly: In spite of the recent 50bp hike in repo rate ahead of streets expectation of 25bp hike, we do not expect the deposit rates to go up further as credit off-take has moderated considerably and deposit mobilization has picked up substantially.
Source: RBI, Angel Research; Note: # from Mar 26, 2010 to Jul 2, 2010, * from Mar 25, 2011 to Jul 1, 2011
Liquidity has eased off: Even our interaction with various banks indicates slowdown in credit sanctions. On the other hand liquidity has eased off considerably with the overnight borrowing window (LAF) averaging ~`45,000cr during FY2012 YTD as compared to ~`88,000cr in 2HFY2011.
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Food and Primary articles inflation has eased off, already: Also the food inflation has cooled off to two-year lows and the primary articles inflation has been easing off in the recent months, indicating some respite on the inflation front as well.
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IIP has moderated considerably; GDP growth at 5-quarter lows: The recent macro-economic data has been indicating moderating growth, indicating at least some respite on the demand-side inflationary pressures. The latest Industrial Production growth for the month of May 2011 came in at 5.6% as compared to 8.5% in May 2010. Also the GDP data for March 2011 quarter saw the easing of growth continuing from 9.4% in 4QFY2010 to 7.8% in 4QFY2011. The recent data on PMI also suggests some moderation in manufacturing activity. Exhibit 4: GDP growth coming off
(%) 10.0 9.0 8.0 7.0 6.0 5.0 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 9.4 9.3 8.9 8.3 7.8
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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 increase in overall macro-economic risks and the 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 mobilization, 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-thanexpected 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 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 mobilization 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 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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E-mail: research@angelbroking.com
Website: www.angelbroking.com
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