Repo and reverse repo rate cut by 50bps each; CRR unchanged
After weeks of speculation, the Reserve Bank of India (RBI) cut its benchmark rates today by 50bps each while keeping CRR unchanged at 5%. Post these policy measures, repo rate and reserve repo rate stand at 5% and 3.5%, respectively. A few players in the market were vying for a CRR cut, however, given the liquidity reflected in surplus parked in reserve repo window (INR 679 bn), RBI has chosen to preserve its arsenal for future. The overall tone of RBI was that of caution emphasizing on reduction of interest cost and monitoring of asset quality.
Credit growth dipped to 20% Y-o-Y in the fortnight
Credit growth for the fortnight ending Feb 13 was at 19.8% while deposit growth was at 21%. Incremental CD ratio for YTD is at 60% suggesting let up in demand. We believe RBI's 24% credit growth target may not be achieved; more likely growth estimate in our view is ~21%.
Lending and deposit rates softening
PSU banks already have cut deposit rates by 100-150bps to 8-9% (SBI is offering 8.1% for 1-2 year deposits). Banks which continue to lend (PSU banks) have started offering sub-PLR rates to corporates, which may dip further. Though immediate reaction may be limited, over 3 months we expect 100bps easing in lending/deposit rates. With preemptive cuts effected by PSU banks, the onus clearly is on private banks which have not been as proactive as their public sector peers in passing the benefit of lower costs. Wholesale cost of funds would soften further. We believe HDFC would get some room to lower its lending rates (and compete with SBI offer) as incremental cost of funds will come down further from 8.0-8.5% levels (prevailing now). Banks' margin should remain largely stable as the positive impact of wholesale book re-pricing and CRR cuts get offset by lower investment/money market yields.
Outlook: Global uncertainty and NPL concerns overweigh
Banking stocks have been under pressure due to global negative news flows and large fiscal deficit. The Bankex has underperformed broader markets by ~16% since January 1, 2009. Though near term news flows could continue to be negative in terms of corporate stress, our over the cycle view on NPL suggest earnings growth of >10% for FY10-11E in select stocks.
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