Banks sustain bias for SLR investments Report - Edelweiss

Foreign exchange reserves as of week-ended January 9 reported a week-on-week decline of USD 0.48 bn, currently at USD 254.58 bn. The predominant influence has been of the foreign currency assets that have declined in value by USD 0.458 bn, owing to depreciation of the non-US currencies – EUR and sterling.

The credit-deposit ratio of banks has been consistently declining since December 19 (the total fall amounting to 100bps). Correspondingly, the investment-deposit ratio has risen 113bps over the same period. Analysing the source and investment of funds of the banking institutions, we observe:

(1) Aggregate deposits of the banking system rose a whopping ~INR 700 bn over the fortnight ended January 2, taking the growth rate for the period to 2% (relative to a contraction of 0.2% over the previous fortnight).

(2) Non-food credit by scheduled commercial banks (SCBs), which shot up in the previous fortnight ended December 19, picked up 7 times to increase the credit levels to INR 119.61 bn.

(3) Banks' SLR investments rose an impressive 5.7% (by INR 622.6 bn) for the fortnight ended January 2 against contraction of 1.8% last fortnight; investment-deposit ratio for the same period stood at 31.73% (up 113bps).

We conclude a persistent bias of the banking system for investments in the government securities segment as opposed to their commercial on-lending operations. SLR investments accounted for 89% of the increase in deposits; more importantly, the growth in SLR investments has been nearly thrice as much as growth in aggregate deposits. The benchmark 10-year yield reported a rally to the 5% mark from the fortnight's high of 5.74%.

The money supply (M3) witnessed a growth of 1.4% over the fortnight, holding at 19.6% as on January 2, adding INR 617 bn to the total outstanding of ~INR 45 trn. This can primarily be attributed to the soaring aggregate deposits that have correspondingly induced a higher money multiplier (defined as the rate at which the reserve money churns itself to result in the outstanding stock of M3) for the week ended January 2 by 4bps, to 5.04.

Over the week ended January 9, RBI purchased bonds of INR 9.79 bn, of which, INR 6.65 bn were under the SMO category, significantly lower than the INR 27.10 bn purchased in the previous week ended January 2.

Banks' investments in mutual fund instruments witnessed an increase of 41% for fortnight ended January 2, shooting the exposure to INR 449.55 bn.

Source : Equity Bulls

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