Monetary Policy - Improved transmission=lower borrowing cost - Anand Rathi

The 25bps rate cut was in line with our expectation. Key takeaways from the policy are: (i) RBI wants to improve monetary policy transmission, i.e., liquidity easing will continue; (ii) lowering of HTM ceiling for investments means that banks now have to choose between credit and market risk, which could boost credit; and (iii) RBI sensitises that large CAD can feed inflation through a weaker rupee. We expect up to 100bps rate softening in credit and debt markets.

Repo rate slashed, CRR unchanged. In line with market and our expectations, RBI today lowered the repo and reverse-repo rates 25bps each, to 7.25% and 6.25%, respectively. Cash reserve ratio (CRR) remained unchanged at 4% of net demand and time liabilities (NDTL).

5.7% growth likely in 'blue sky' scenario. Assuming a normal monsoon and resultant pick-up in agriculture growth, RBI estimates 5.7% rise in GDP in FY14. It projects WPI inflation at 5% by end-Mar'14. Deposits could grow at 14% and non-food credit at 15%, in FY14. Apart from the year end inflation target of 5%, other projections of RBI for FY14 are broadly in line with our estimates.

Higher SLR holdings in HTM category. RBI has realigned the cap of total SLR securities in the HTM (held to maturity) category to 23% of NDTL, against 25% earlier. The marked-to-market provisioning requirement for SLR holding beyond statutory minimum means banks would now face market risk on such investments. This can nudge banks to trim excess SLR investment and thereby improve credit growth.

Rate cut unlikely to soften lending rates. The substantial monetary softening since Jan'12 (cut in repo rate by 125bps, CRR by 200bps and SLR by 100bps) is yet to get transmitted as lower bank lending rates. Continuance of tight liquidity under LAF (liquidity adjustment facility), prevented this transmission. Today's policy aims to improve the transmission. RBI, therefore, is likely to follow an easy liquidity policy.

LAF liquidity likely to turn positive soon. From an average deficit of ~Rs. 1,000bn during 4QFY13, LAF liquidity deficit has eased to Rs. 845bn during 1QFY14 (as on 2 May'13). We expect it to turn positive in coming months due to higher government spending, aggressive OMO and a switch in household savings from physical to financial. Deposit growth figure is up from 11.1% in Dec'12 to 13.3% as on 20 Apr'13, partly reflecting higher household savings.

Effective policy rate to soften by 125bps. As the LAF balance turns positive, reverse repo becomes the policy rate in place of repo, resulting in an effective fall in policy rate by 100bps. We expect another 25bps rate cut in CY13. The LAF surplus would also transmit the past rate easing. We expect borrowing costs in credit and debt markets to slide 100bps in CY13.

Source : Equity Bulls

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