Repo, CRR kept unchanged, 50bps cut likely in Q1CY13 - RBI Policy Review - BRICS

Repo/CRR kept unchanged, 50bps cut likely in Q1CY13, need to watch government's balances: In its mid-quarter policy review, the RBI did not cut the repo-rate, which was in line with its guidance of a likely cut in Q1CY13. We were not surprised by the RBI's inaction on the CRR front, mainly because the current LAF deficit will correct in another 7-8 days, as the tax collections flow back into the market, and the government continues to hold higher cash balances - providing a ready supply of liquidity. The RBI reiterated and re-emphasized its earlier stance that its monetary policy will now need to support growth. As mentioned in our last report, we continue to expect a 50bps cut in the RBI's third quarter policy review, barring any unforeseen shocks. The key factor to watch out for will be the diverging trend in the WPI and CPI, which could play spoilsport to the RBI's monetary easing. The liquidity infusion post a rate cut in Q1CY13 may not call for a CRR cut, as the government could release its cash balances (Rs90bn as per WSS, though actual figure is way higher and is never reported), thus improving the liquidity deficit situation.

Managing higher NIMs to be a tough task, going forward: We would also like to re-emphasize that a rate cut cycle will almost certainly demand adequate liquidity in the system to force and for banks to pass on the rate cut benefits. This, apart from the possibility of a drop in CD ratio, will in all certainty lead to an asymmetric fall in yield-on-assets (70-80% of book is tied to floating rates) and cost-of-funds (takes at least a year to unwind the higher cost funds), thus exerting pressure on NIMs. We are also unlikely to see any improvement in loan growth - much of the growth in the last 6-8 weeks has come in the retail segment and corporate loan growth has remained subdued. With NPAs still ruling high and valuations no longer cheap, we continue to be neutral on banks. We most certainly believe that banks are unlikely to outperform the broader market over the next few quarters.

Source : Equity Bulls

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