Banking
Third quarter review of monetary policy
The Reserve Bank of India (RBI) has left all key policy rates unchanged in third quarterly review of monetary policy for 2008-09. Even as the RBI has maintained a wait and watch approach (after sharp cuts enacted earlier), we believe that the RBI still has scope to reduce all three key policy rates (repo, reverse repo and CRR) by upto 50bps. However, the same may now happen only in Q1FY10.
The policy has estimated the fiscal deficit to be 5.9% of GDP (3.3% actual till Nov-2008) compared with 2.5% in budget estimates. The policy move and the deficit estimates support our view that the G-Sec yields may remain in the range of 6.0-6.5% going forward and may not touch their low of <5% again.
The RBI has also acknowledged the fact that the lending rates still have significant room to go down even as the deposit rates may remain sticky. We believe that the margin pressure is likely to build in FY10 for banks.
We maintain our cautious outlook on the sector. We would prefer BoB, PNB, UBI against SBI, Canara Bank and Allahabad Bank.
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