Monetary Policy Review - Jan 2013

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CRISILMonetaryPolicyReviewCredit set to become cheaperCRR cut to make repo rate transmission more effective

Overview: The Reserve Bank of India (RBI), in its monetary policy review on January 29, 2013, reduced the repo rate by 25

basis points to 7.75 per cent. It also lowered the cash reserve ratio (CRR) by 25 basis points to 4.0 per cent in order to reduce

liquidity tightness in the system. A sustained decline in core inflation (non-food manufacturing inflation) and the governments

continued efforts towards fiscal consolidation paved the way for a repo rate cut by the RBI. Core inflation declined to 4.2 per cent in

December 2012 from a peak of 5.8 per cent in August, indicating moderating demand-side pressures in the economy. Last week,the government announced phased deregulation of retail diesel prices as well as a one-time hike in bulk diesel prices, which

despite their short-term inflationary impact, are critical for lowering fiscal deficit. The moderation in core inflation suggests that the

second-round impact of diesel price increases on inflation are unlikely to be significant due to slowing demand in the economy.

A 25 basis point cut in repo rate combined with a reduction in CRR, will enable banks to lower lending rates and improve

transmission of monetary policy. As inflationary expectations adjust downward, banks will have greater flexibility in reducing deposit

rates, thereby lowering their cost of funds. This will create further space for a reduction in lending rates in coming months.

Declining core inflation paves way for rate cut

WPI inflation declined to a 3-year low of 7.18 per cent in

December 2012. Core inflation, as measured by CRISILCore Inflation Indicator (CCII), fell for a third consecutive

month and stood at 5.5 per cent in December 2012.

Inflation now appears to be on a downward trajectory and

is expected to decline to 6.8 per cent by March-end 2013

as per the RBIs latest forecast.

CCII* excludes base metal prices from WPI manufacturing inflation; Source: Ministry of Commerce and Industry, CRISIL Research

Monetary policy transmission to strengthen

The base lending rates across banks have declined by

only 25-30 basis points since March 2012, despite a 50basis point reduction in repo rate in April 2012

Average deposit rates for 1-2 year term deposits across

10 large Indian banks have fallen only marginally from 9.2

per cent in March 2012 to 8.7 per cent in January 2013.

As inflation eases further in Q4, 2012, banks will be able

to lower deposit rates. Lower deposit and repo rates will

enable banks to reduce lending rates in the coming

months.

Note: Deposit Rate*: Simple average of 1-2 year ter m deposits of 10 large Indian banks; Source: RBI, CRISIL Research

7.18

4.2

5.5

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12

%, y-o-y

RBI core inflation

WPI

CCII*

6.00

6.50

7.00

7.50

8.00

8.50

9.00

9.50

Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13

%

Repo Rate

Deposit Rate*

January 2013


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CRISILMonetaryPolicyReview

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Credit offtake to revive slightly in 2013-14

Aggregate y-o-y bank credit growth moderated to 15.8 per

cent as on January 11, 2013, from 19.4 per cent as on

March 30, 2012, due to sluggish investment demand and

increased risk aversion, given the deterioration in the asset

quality of public sector banks (PSBs) over the past fewquarters.

The 25 bps cut in cash reserve ratio (CRR) will release

non-income generating funds of about Rs 180 billion into

the banking system. This would give banks enough room to

cut rates on select portfolios ahead of the seasonal pickup

in credit offtake in the fourth quarter.

Aggregate bank credit is expected to grow by 17-18 per

cent y-o-y in 2013-14, driven by improvement in agriculture

growth, consumption-led recovery in economy, and pre-

election welfare spending by the government.

Deposits to grow by 14-15 per cent in 2013-14

Growth in bank deposits slowed down to 12.8 per cent y-o-

y as on January 11, 2013, primarily due to repayment of

bulk deposits by PSBs and decline in current account

deposits.

In 2013-14 as well, mobilising deposits will remain a

challenge for banks. While inflation is expected to

moderate, term deposit rates are also likely to decline with

the reduction in policy rates. We expect bank deposits to

grow by 14-15 per cent y-o-y in 2013-14.

Source: RBI, CRISIL Research

NIMs to decline by 10-15 bps in 2013-14

NIMs of banks have remained fairly stable in 2012-13.

While demand for funds has been subdued, cost of funds

has come down due to repayment of high-cost bulk and

wholesale deposits.

During 2013-14, we expect lending rates to decline

because of reduction in policy rates as well as increased

competition amongst banks. However, as deposit re-pricing

takes place with a lag, the NIMs are expected to decline by

10-15 bps y-o-y.

Source: CRISIL Research

8%

12%

16%

20%

24%

28%

Dec-10 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13

Credit growth

8%

12%

16%

20%

24%

28%

Dec-10 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13

Deposit growth

2.5%

2.7%

2.9%

3.1%

3.3%

3.5%

Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12

Quarterly NIMs of SCBsQuarterly NIMs of SCBs

Source: RBI, CRISIL Research


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Analytical Contacts:

Ajay Srinivasan Vidya Mahambare Neha Duggar Saraf

Director, CRISIL Research Principal Economist Junior Economist

Email: [email protected] Email: [email protected] Email: [email protected]

Media Contacts:

Priyadarshini Roy Jyoti Parmar

Manager, Communications and Brand Management Assistant Manager, Communications and Brand Management

Email: [email protected] Email: [email protected]

Phone: +91 22 3342 1812 Phone: +91 22 3342 1835

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Last updated: April 30, 2012

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Monetary Policy Review - Jan 2013