RBI announced the annual policy for Fy12 on 3.5.2011
Policy actions undertaken are as follows
• Repo Rate increased by 50 bps to 7.25%
• Reverse repo to be now a derived value fixed at 100bps discount to Repo. The new rate is 6.25%
• MSF, a new programme for banks to borrow overnight from RBI, with the rate fixed at 100bps premium to repo rate (8.25%).
• Savings Rate increased by 50 bps from 3.5% to 4%.
• Provisioning requirement for certain non-standard assets increased by 10 percent.
All the measures combined would lead to margin compression for the banking space. Also, higher interest rates might lead to further NPL creation.
The tone of the policy was clearly hawkish. RBI stressed on managing inflationary expectations as its number one priority. It expects the high crude oil and commodity prices to sustain at these levels and even gain going forward. RBI has forecasted the Fy12 growth at 8%. There could be downside risks to that if infrastructure and manufacturing activity slows down further. RBI also expressed concern about the ongoing fiscal consolidation with the budgeted crude oil and fertilizer subsidies being clearly insufficient. This might lead to enhanced government borrowing programme in H2 FY12 putting further upward pressure on bond yields.
Banks have corrected almost 10% in the last one week. While most of the price correction would be over in next few days, the stocks might stay subdued for some time. We are changing our stance on the banking space from overweight to neutral with a bias towards private sector names.
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