Reaction on RBI policy - Mr Kapil Wadhawan, CMD, DHFL

In Mid-quarter monetary policy, RBI surprises market by hike in repo rate by 25 bps. However, RBI adds comfort via reducing the marginal standing facility (MSF) rate by 75 basis points from 10.25 per cent to 9.5 per cent. RBI also reduces the minimum daily maintenance of the cash reserve ratio (CRR) from 99 per cent of the requirement to 95 per cent effective from the fortnight beginning September 21, 2013 but has however kept CRR unchanged at 4%.

On the domestic front, growth has weakened with continuing sluggishness in industrial activity and services. The pace of infrastructure project completion is subdued and new project starts remain muted.

It seems RBI's focus is inflation and not growth. The current inflation rate is above the RBI's comfort zone and pressure has been building up for headline inflation to move upwards.

The hike in repo rate by 25 bps is the biggest surprise from the RBI. The immediate reaction from the stock market is negative and bond yield up to 8.39% at this time from 8.20% closing rate on last trading day. The pressure on interest rates has been there since long time however the worry is pressure likely to continue till the time inflation is not falling in RBI's comfort zone.


Short term interest rates have been rising and they are well above the repo rate (7.50%).

The key take-away from today's RBI policy is - inflation is the biggest concern and RBI may hike repo rate if inflation refuses to fall in RBI's comfortable zone.

The inflation pressure is likely to stay some more time as we have seen a rise in global crude oil and energy prices. If inflation is a major concern for RBI, then banks and financial institutions will have to take care oflending portfolio very carefully from here onwards as inflation is likely to remain above the RBI's comfort zone.

Reduction in MSF and CRR (daily maintenance) will have positive impact on liquidity, however hike in repo rate will add pressure on lending rates.

Mr. Kapil Wadhawan, CMD - DHFL commented, "In case of DHFL, in Q1, DHFL maintained less than 1% gross NPA and net NPA of close to zero. I believe the second quarter too will have similar NPA numbers. At DHFL, we have not felt too much of a pinch on liquidity but clearly the cost of funds have been moving up in tandem with all the other macroeconomic factors that we are seeing around us. The current global and domestic macro economic scenario is critical.

It is premature to assume that interest rates will go up immediately. The current short -term interest rates and CDs rates are much higher than repo rate (7.50%).

We have seen robust demand in tier II and tier III markets where we specialize in. We haven't seen too much of stress on our asset book when it comes to non-performing loans.

I was expecting much more from the policy, in terms of infusing more liquidity in the system, however the focus seems more on inflation as compared to growth."

Source : Equity Bulls

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