Dear All,
Forwarding you the RBI Monetary Policy Review.
Tackling inflation head-on
The Reserve Bank of India (RBI), stepping up its anti-inflationary stance, raised both repo and reverse repo rates by 50bp each to 7.25% and 6.25%, respectively, in its annual 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 policy action was in-line with our expectations.
Policy tone turns more hawkish
The tone of the overall policy statement has turned distinctly more hawkish. The RBI has forecasted inflation to remain elevated, close to March 2011 levels (9.0%), over the first half of FY2012, before moderating in the second half to 6.0%, as of March 2012. The RBI believes that global commodity prices, which have surged in the recent months, are at best likely to remain firm and may well increase further over the course of the year, indicating that higher inflation will persist and may indeed get worse. Hence, to contain inflation, the Central Bank has targeted at reducing overall demand by increasing lending rates. Through the policy action, the RBI expects to contain inflation by reigning in demand-side pressures and sustain growth in the medium term by containing inflation.
Downside risks to GDP and consequently credit growth
With the signs of moderation emerging in the second half of FY2011, the RBI has projected real GDP growth for FY2012 to be at 7.4–8.5%, with a probability of 90% (baseline projection of 8%). This is lower than the Finance Minister’s budgetary target of 9.0%, highlighting the downside risks to the targeted GDP growth and, consequently, credit growth.
Outlook
The RBI has clearly highlighted its concern on inflation by reducing its growth projections (basically demand-side pressures on inflation) for FY2012 compared to FY2011 and concentrating solely on containing inflationary pressures. We have reduced our earnings estimates for our banking sector coverage universe to take into account the increase in savings rate, as well as factor in lower credit growth for FY2012E. Also, with the upward bias in interest rates, downward risks to economic growth and consequently credit growth, we have reduced the target multiples for our banking sector coverage universe. On account of cheaper valuations post the sharp correction in banking stocks in the past few days and taking into account FY2012E and FY2013E earnings growth outlook,
we remain positive on banks with structurally stronger deposit franchises. Our top pick in the large-cap universe remains Axis Bank. We also like ICICI Bank, State Bank of India and Bank of Baroda amongst the large caps. Considering the valuations, we also recommend a buy on Bank of India and Oriental Bank of Commerce.
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With best regards,
Fundamental Advisory Desk
Angel Broking
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Disclaimer: Ours is an advisory role. The final decision and consequences based on our information is solely yours. Moreover, in keeping with regulatory guidelines, we do not guarantee any returns on investments. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice.
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