·
Repo
Rate – The repo rate
under the liquidity adjustment facility (LAF) has been cut by 25 bps to
7.25%.
·
Reverse
repo rate & MSF –
Consequently, the reverse repo rate under the LAF has been cut by 25 bps to
6.25% with marginal standing facility (MSF) rate and the Bank Rate at 8.25%.
·
Cash
Reserve Ratio – The
CRR of scheduled banks has been retained unchanged at 4.0% of their net
demand and time liabilities (NDTL).
·
Statutory
Liquidity Ratio – The
SLR has been retained unchanged at 21.5% of their net demand and time
liabilities (NDTL).
Key Takeaways
from RBI policy
RBI has cut the repo rate by 25 bps to 7.25%
in line with consensus estimate. This is the third rate cut in this year
cumulating to the total of 75 bps cut. The rationale given by RBI for this rate
cut was the i) low domestic capacity utilisation, ii) mixed indicators of
recovery, and iii) subdued investment & credit growth. It felt that it was
better to front load the rate cut. However, the policy statement was more on a
hawkish side as CPI projected by RBI was raised from 5.8% to 6% by January
2016. RBI is cautious that inflation may again start inching higher post August
as the base effect wanes off. Governor has categorically mentioned that it has
front loaded this rate cut and future rate cuts shall be data dependent. RBI
sounded cautious on future data on account of i) below average monsoon
prediction by MET, ii) higher crude price and iii) volatility in external
environment. RBI also expects the banks to pass on the benefit of this repo
rate cut by lowering their base rate which is negative for banking sector.
Outlook
Although RBI has cut the repo rate, majority
of statements were hawkish in nature. RBI has projected CPI of 6% by January
2016 while it is targeting the real interest rate (difference between the CPI
and repo rate) in the range of 1.5-2%. With repo rate at 7.25% now, we believe
that CPI shall stay at 5.5% of sub 5.5% for further rate cuts. We believe that
interest rate policy will be on a halt till September post which CPI data will
be a crucial factor. RBI is in the process of building the framework for banks
to use the marginal cost of funding for calculating their base rate. In current
downward trending interest rate scenario, the marginal cost of funding method
shall be negative for banking sector as the base rate revision is faster. While
the benefit of lower cost of fund is accrued gradually over the period of time
as deposits are re-priced but the adverse impact of lower base rate is
immediate. One can use this correction as an opportunity to buy the good
quality private sector banks and NBFCs having steady earnings growth
trajectory. Our preferred picks include Yes Bank, Indusind Bank, ICICI Bank,
HDFC Bank, HDFC Ltd and Dewan Housing Finance.
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