Monetary Policy - More liquidity infusion, see 50bps fall in lending rate - Anand Rathi

The 25bps CRR cut today would boost bank profitability by Rs.2,000 cr, much higher than Rs.75 cr cost reduction that a 25bps repo rate cut would have effected. We expect intensification of OMO in 2HFY13 (@ Rs.20,000 cr/month) to bring the banking sector liquidity into surplus. We expect 50bps reduction in cost of funding of the corporate. Inflation softening from Feb'13 is likely to start the rate cut cycle.

- RBI holds policy rates. RBI today kept the repo and reverse-repo rates unchanged, at 8% and 7% respectively. The marginal standing facility also stands unchanged at 9%.

- 25bps CRR cut. Despite liquidity reverting to the comfort zone, RBI cut the cash-reserve ratio (CRR) 25bps, to 4.5% of net demand and time liabilities (NDTL) effective from 22 Sep'12. The move would inject ~Rs.17,000 cr liquidity into the system.

- Liquidity situation better. Liquidity in the system has been in a deficit mode for the past two years. Since Sep '12, the daily average borrowings under the liquidity adjustment facility stand at ~Rs.28,000cr.

-Cutting CRR 23x more effective. A 25bps cut in CRR currently means ~Rs.1,700cr additional yearly income for banks (with yield @10%). 25bps repo cut leads to Rs.75cr annual cost reduction (on Rs.30,000 LAF borrowing) for the banking sector. At this juncture therefore, cutting CRR makes more sense than cutting repo rate, to have such action passed on through lower lending rates.

- What it means for markets. The 25-bps cut in CRR would inject Rs.17,000 crore liquidity into the system. We expect Rs.20,000/month liquidity injection through OMO (open market operation) Oct'12 onwards. Aggressive liquidity infusion by RBI would turn the LAF liquidity into surplus. Thus, the reverserepo would become the effective policy rate. This would mean 100bps reduction on the benchmark rate as reverse repo rate is fixed at 100bps lower than the repo rate. We expect this to bring down the effective borrowing rate for corporate by ~50bps. Also, we expect yield on g-sec to soften by ~100bps on the short and ~25bps on the longer end.

- Our take on the policy. We maintain that RBI would take the liquidity route to boost the slowing economic activities, given the upward trajectory of inflation. We expect ~100bps cut in CRR and Rs.2trn of open-market operations in FY13. These two measures would push up liquidity to a surplus and, in turn, would mean a 100bps effective rate cut since the reverse repo would turn into the operative rate in a liquidity-surplus scenario. With softening of inflation, we expect the policy rate cut cycle to start in 4QFY13.

Source : Equity Bulls

Keywords