Dear All,
Forwarding you the Mid-Quarter Monetary Policy Review.
Gradualist approach returns
§ Hikes repo rate by 25bp to 7.5%
§ Consequently reverse repo rate stands at 6.5% and MSF rate at 8.5%
§ Keeps SLR and CRR unchanged at 24.0% and 6.0%, respectively
The Reserve Bank of India (RBI) in line with our as well as street’s expectation resumed its gradual monetary tightening stance and hiked the repo rate by 25bp. In our view, this hike is unlikely to cause across-the-board increase in lending rates as witnessed after the last policy review in May, due to relatively smaller impact on the cost of funds as compared to a saving rate hike. The credit growth has moderated from the recent peaks, as evident from decline in credit off-take by 23.5% yoy in the last three months. With the sharp hike in term deposit rates over the past six months, deposit accretion has picked up considerably, as reflected in increase in deposit mobilization by 69% yoy in the last three months.
Policy stance remains firmly anti-inflationary
With the headline inflation rising from 8.7% in April 2011 to 9.1% in May 2011 and more importantly with the step up in core inflation (non-food manufacturing) from 6.3% in April 2011 to 7.3% in May 2011, the RBI continued its policy tightening stance and increased repo rate by 25bp to 7.5%. Concomitantly the reverse repo rate stands at 6.5% and Marginal Standing Facility (MSF) rate has increased to 8.5%. RBI has also highlighted upward revision risks in inflation data for April and May, considering the revision of March 2011 headline inflation to 9.7% from 9.1%. More concerning fact for the RBI has been the increase in core inflation to 7.3% which was already well above its medium-term trend of 4.0%. The increase in core inflation, according to the RBI, indicates more generalization of inflationary pressures, rising wages and costs of service inputs are apparently being passed on by producers. However, on the positive side, the spread between primary articles inflation and manufactured products inflation has narrowed further to 4.0% during May 2011 from as high as 13.1% in January 2011, suggesting good portion of pass-through of raw material costs has already taken place, in our view.
Outlook
We believe that the lending rates are likely to peak at a lower level in this cycle compared to the previous one as the inadequacy of forex inflows in this cycle is likely to lead to a weaker demand momentum. We expect the lending rates to peak at ~50bp from the current levels. Hence, we maintain our positive stance on the banking sector, taking into account the still healthy credit demand and good earnings visibility for large banks.
We continue to recommend selective stock-picking strategy and favour the large private sector banks over the public ones. Our top picks include Axis Bank and ICICI Bank from the private banking universe and SBI and Bank of Baroda from the public sector banks.
Kindly click on the following link to view the Report.
Mid-Quarter Monetary Policy Review
If you have any further queries, feel free to call us on 022 39357600, Extn: 6865 or mail us at advisory@angelbroking.com
With best regards,
Fundamental Advisory Desk
Angel Broking
Akruti Star,6th Floor, Road No.7,MIDC, Andheri (E),Mumbai – 93.
Call : (91) (022) 39357600 Ext. 6865
Website : www.angelbroking.com
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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