Banking & Financial Services - RBI - more direct and stringent: deleveraging to speed up - Emkay

Steps taken by Reserve Bank of India (RBI) yesterday with respect to Cash Reserve Ratio (CRR) and Liquidity Adjustment Facility (LAF) would tighten the liquidity impact more than it's July 16, 2013 announcement (see our report, "Liquidity measures; Negative for wholesale funds" on same date). We estimate these measures would tighten liquidity equivalent to ~100bp CRR hike. From the foreign exchange (FX) market stand point, the RBI's measure will help widen the global interest rate spread and galvanize the Indian banking system from undue leveraging. In addition, lower liquidity support from the RBI will accelerate the pace of banking sector deleveraging. Lower credit growth, squeeze on margins, deeper NPAs cycle and higher credit cost strengthen our Underweight view on Banking. Margins impact of hardening rate would be higher on the banks which are funded with shorter maturity deposits.

RBI announces further measures to curb FX volatility

The RBI yesterday announced further measures to curb the FX volatility as follows:

- Effective July 27 ,2013, the banks will have maintain a minimum of 99% of required minimum CRR (4% currently) vs. 70% earlier on daily basis and not only reporting Friday

- Effective July 24, 2013, the individual bank limit under LAF will be capped at 0.50% of the respective bank's Net Demand and Time Liabilities (NDTL).

Source : Equity Bulls

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