1
CRISIL MonetaryPolicyReview
Inflation concerns take precedence over growth
* For more details on CCII, refer to http://www.crisil.com/index.jsp
Overview
In its mid-quarter monetary policy review on June 18th, the Reserve Bank of India kept the repo rate unchanged at 8.0 per cent, citing rising risks to inflation and limited role of interest rates in reviving growth at this juncture. The RBI reiterated that factors other than interest rates were responsible for the slowdown in economic activity. A turnaround in growth, driven only by lower interest rates, is unlikely given the poor investment climate. At present, policy-related risks and uncertainty dominate business concerns. Lower interest rates can help stimulate consumption demand via its positive impact on retail credit, but cannot lead to a sustained rise in investment activity unless complemented by steps aimed at overcoming policy-related bottlenecks.
In addition to a supportive investment climate, a lasting improvement in the investment and growth scenario is critically reliant on low and stable inflation environment. So unless the global economic situation worsens significantly, the RBI is unlikely to resort to aggressive rate cuts during the rest of the fiscal as inflation continues to be a major problem. Despite a sharp deterioration in growth, WPI inflation remains elevated at around 7.5 per cent. Further, while moderation in CRISIL core inflation indicator*to 4.3 per cent in April-May 2012 confirms lowering of demand pressures in manufacturing, it still has not declined enough to bring overall WPI inflation to its acceptable level.
RBI maintains status quo on policy rates
• The RBI kept policy rates unchanged in view of rising inflationary concerns. Repo, reverse repo and marginal standing facility (MSF) rates therefore remain at 8.0, 7.0 and 9.0 per cent respectively.
• While manufacturing output contracted by 0.3 per cent in the fourth quarter of 2011-12 on the year-on-year basis, inflation remains much higher, indicating strong upside concerns.
Moreover, the recent hike in minimum support prices and the weakening rupee will also increase inflationary pressures.
• Recently, CRISIL Research revised its inflation forecast up to 7.0 per cent, from 6.5 per cent released earlier. The revision was mainly on account of resurgence in food inflation momentum and the impact of a weaker rupee.
*as of January 22, 2012. Source: RBI, FIMMDA
Chart 1: Growth, Inflation and policy rates
June 2012
Note: Inflation for the quarter ending June is the average for April- May 2012
Source: CSO, RBI, Ministry of Industry
-1.0 1.0 3.0 5.0 7.0 9.0 11.0 13.0 15.0 17.0 19.0
Sep-05 Jun-06 Mar-07 Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 Jun-12
%
Repo rate at 7.75 per cent
Repo rate at 5.00 per cent Repo rate at 9.00 per cent Repo rate at
6.00 per cent
Repo rate at 6.00 per cent
Repo rate at 8.5 per cent
Repo rate at 8.0 per cent Manufacturing growth y-o-y Manufacturing inflation (WPI)
CRISIL MonetaryPolicyReview
2
Inflation pressure increases
• Wholesale Price Index (WPI)-based inflation rose to 7.5 per cent in May 2012, compared to an average 7.3 per cent in January–April 2012. Pickup in food inflation and continuous weakening of the rupee has been exerting upward pressure on the overall index.
• Although core inflation pressures have been steadily declining since December 2011 (implying that domestic demand pressures are moderating), a weaker rupee is exerting pressure on the imported component of inflation.
On a year-on-year basis, while, global crude oil prices have declined by 15.8 per cent in June 2012 (till date) the rupee has depreciated by almost 24 per cent.
• In view of this, and rising food inflation, overall inflation will remain much higher than RBI’s stated tolerance limit of 4.0 - 4.5 per cent.
Source: Ministry of Industry, CRISIL Research
Limited role of interest rates in reviving investment activity
• Although the RBI began cutting interest rates in April 2012, it is yet to see significant pass-through into bank lending rates. This is because the cost of funds for the banking system continues to remain high due to the tight liquidity situation and high deposit rates.
• Moreover, while there has been a significant drop in credit to industry since June 2011, retail credit demand offtake remains strong. The decline in credit to industry is partly on account of other policy uncertainties and supply-side constraints to growth and investment.
• Easing of bank lending rates, if any, therefore is unlikely to have much impact on industrial credit growth, unless supported by improvement in investment climate.
Chart 2: Inflation
0.0 3.0 6.0 9.0 12.0 15.0
Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12
%, y-o-y
Imported inflation Overall inflation Core inflation
Note: Base rate is calculated as the average of 5 major banks Source: RBI
Chart 3: Interest rate and credit growth
0.0 2.0 4.0 6.0 8.0 10.0 12.0
-2.0 3.0 8.0 13.0 18.0 23.0 28.0 33.0
Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12
Credit growth Base rate - RHS
%
%, y-o-y
Industry
Retail
8%
12%
16%
20%
24%
28%
May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12
( Gro wt h, y-o - y %)
Industry Se rvic es P erso nal lo a ns
T ext ile s Iro n &
iro n pro ducts
Infra str uct ure
1QFY09 26.9 31.3 15.9 20.9 24.4 41.7
2 QF Y0 9 30.6 3 5.3 17.4 23 .1 3 3.7 3 5.8
3QFY09 30.2 27.6 14.6 18.4 24.7 38.5
4 QF Y0 9 25.8 19.2 8.5 12.5 3 7.0 3 5.1
1QFY10 21.2 20.5 5.5 8.3 29.9 35.1
2 QF Y10 17.9 11.0 2.3 9.3 2 3.2 4 4.7
3QFY10 15.7 11.5 -0.4 9.2 21.3 43.2
4 QF Y10 20 .1 15.0 4.7 12.7 2 3.9 4 2.3
1QFY11 25.8 14.1 6.5 18.6 26.2 44.3
2 QF Y11 29.2 2 1.0 8.9 16.7 2 6.5 5 5.0
3QFY11 27.4 25.0 13.4 17.0 28.2 43.1
4 QF Y11 23.6 2 3.9 17.0 19.2 2 8.0 3 8.6
1QFY12 22.0 20.9 17.3 20.3 21.0 30.2
2 QF Y12 22.9 19.3 15.2 17.5 2 6.8 2 0.3
3QFY12 19.8 14.9 12.3 12.5 20.0 20.5
4 QF Y12 21.3 14.7 12.1 10.4 18.1 17.6
A pril FY 13 19.5 15.8 11.5 9.5 18.1 14.1
Cash Reserve Ratio (CRR), banks’ cost of borrowing will remain high. Also, given the sluggish growth in deposits, banks are unlikely to significantly cut down deposit rates any time soon as the gap between deposit growth and credit growth remains high.
• However, the relaxation in Export Credit Refinance Facility is expected to potentially provide liquidity support of Rs 300 billion to the banking system, if the relaxation is fully utilised.
• Given the high funding costs, CRISIL Research expects the net interest margins for banks to decline by 10-12 bps during the current fiscal year.
Credit offtake to grow by 17 per cent in 2012-13
• Aggregate y-o-y bank credit growth moderated to 17.6 per cent as on May 18, 2012, from 19.4 per cent on March 30, 2012. Almost 12 per cent of incremental credit was disbursed in the last week of 2011-12.
• Infrastructure credit growth has moderated significantly to 14.1 per cent (y-o-y) as of April 2012 from 38.6 per cent as of March 2011. Telecom has been a major dampener with 5.2 per cent degrowth in outstanding loan as of April 2012. Growth in credit outstanding to the power sector has also reduced to 16.8 per cent as of April 2012 from 43 per cent as of March 2011, on account of risk aversion by banks due to fuel and approval-related issues, and inability of generation companies to pass on the higher cost of imported fuel due to lack of escalation clauses in the power purchase agreements (PPAs). However, there has been some growth in the overall infrastructure segment due to growth in credit to the roads and ports segment, which grew by 19.7 per cent as of April 2012.
• The worsening macroeconomic situation and steady rise in interest rates in the last fiscal year had a pronounced impact on credit flow to small and medium enterprises as compared to large industries. Medium-sized enterprises were the worst hit, registering a deceleration in credit growth from 39 per cent as of March 2011 to 9.6 per cent as of April 2012.
• Aggregate bank credit is expected to post a 17 per cent growth in 2012-13 on account of a slight pickup in investment activity, softening of interest rates and refinancing of foreign currency loans by domestic debt.
Source: RBI, CRISIL Research
FY: Financial year Source: RBI, CRISIL
Table 1: Sector-wise bank credit growth
3
CRISIL MonetaryPolicyReview
30.5
28.1
20.0 24.0 28.0 32.0
Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12
%
40%
60%
80%
100%
120%
May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12
Credit-deposit ratio Incremental credit-deposit ratio
Chart 5: Commercial Banks' investment in SLR Deposits to grow by 17 per cent in 2012-13
• The banking sector deposits unexpectedly grew by Rs 2,088 billion in the last week of 2011-12 (accounting for 23 per cent of incremental deposits for the year), thus propelling y-o-y growth to 17.4 per cent as of March 30, 2012.
• The skewed credit-deposit ratio and tight liquidity conditions compelled banks to aggressively mobilise deposits towards the end of the year, but at a relatively high cost.
• However, growth in deposits slowed down to 13.9 per cent y-o-y, as on May 18, 2012, as demand for funds moderated and depositors channelised their savings to other investment avenues.
• With moderation in credit offtake so far this fiscal and increase in government borrowings, SLR investments have risen to 28.1 per cent as of May 18, 2012, from 26.7 per cent as on March 25, 2011.
• In 2012-13, steady offtake in credit, increase in the household savings rate and an uptick in the current account will support the 17 per cent growth in deposits.
Source: RBI, CRISIL Research
Incremental credit-deposit ratio to remain at 75- 80 per cent by end-March 2013
• The incremental credit-deposit ratio increased to 94.2 per cent on May 18, 2012, from 70.3 per cent on December 30, 2011, owing to lower mobilisation of deposits during the period.
• CRISIL Research expects the ratio to remain at 75- 80 per cent in 2012-13 owing to higher deposit mobilisation vis-a-vis lower credit offtake over the remaining period of the financial year
Chart 6: CD and incremental CD ratios
Source: CRISIL Research
4
Economy and Industry Research
▪ Largest team of economy and industry research analysts in India
▪ Coverage on 70 industries and 139 sub-sectors; provide growth forecasts, profitability analysis, emerging trends, expected investments, industry structure and regulatory frameworks
▪ 90 per cent of India’s commercial banks use our industry research for credit decisions
▪ Special coverage on key growth sectors including real estate, infrastructure, logistics, and financial services
▪ Inputs to India’s leading corporates in market sizing, demand forecasting, and project feasibility
▪ Published the first India-focused report on Ultra High Net-worth Individuals
▪ All opinions and forecasts reviewed by a highly qualified panel with over 200 years of cumulative experience
▪ Largest independent equity research house in India, focusing on small and mid-cap companies;
coverage exceeds 100 companies
▪ Released company reports on all 1,401 companies listed and traded on the National Stock Exchange; a global first for any stock exchange
▪ First research house to release exchange-commissioned equity research reports in India
▪ Assigned the first IPO grade in India
Funds and Fixed Income Research
▪ Largest and most comprehensive database on India’s debt market, covering more than 14,000 securities
▪ Largest provider of fixed income valuations in India
▪ Value more than Rs.33 trillion (USD 650 billion) of Indian debt securities, comprising 85 per cent of outstanding securities
▪ Sole provider of fixed income and hybrid indices to mutual funds and insurance companies; we maintain 12 standard indices and over 80 customised indices
▪ Ranking of Indian mutual fund schemes covering 71 per cent of average assets under management and Rs 4.7 trillion (USD 94 billion) by value
▪ Retained by India’s Employees’ Provident Fund Organisation, the world’s largest retirement scheme
▪ covering over 50 million individuals, for selecting fund managers and monitoring their performance
Equity and Company Research
▪ Largest independent equity research house in India, focusing on small and mid-cap companies;
coverage exceeds 100 companies
▪ Released company reports on all 1,401 companies listed and traded on the National Stock Exchange; a global first for any stock exchange
▪ First research house to release exchange-commissioned equity research reports in India
▪ Assigned the first IPO grade in India
CRISIL MonetaryPolicyReview
About CRISIL Limited
CRISIL is a global analytical company providing ratings, research, and risk and policy advisory services. We are India's leading ratings agency. We are also the foremost provider of high-end research to the world's largest banks and leading corporations.
About CRISIL Research
CRISIL Research is India's largest independent and integrated research house. We provide insights, opinions, and analysis on the Indian economy, industries, capital markets and companies. We are India's most credible provider of economy and industry research. Our industry research covers 70 sectors and is known for its rich insights and perspectives. Our analysis is supported by inputs from our network of more than 4,500 primary sources, including industry experts, industry associations, and trade channels. We play a key role in India's fixed income markets. We are India's largest provider of valuations of fixed income securities, serving the mutual fund, insurance, and banking industries. We are the sole provider of debt and hybrid indices to India's mutual fund and life insurance industries. We pioneered independent equity research in India, and are today India's largest independent equity research house. Our defining trait is the ability to convert information and data into expert judgements and forecasts with complete objectivity. We leverage our deep understanding of the macroeconomy and our extensive sector coverage to provide unique insights on micro- macro and cross-sectoral linkages. We deliver our research through an innovative web-based research platform. Our talent pool comprises economists, sector experts, company analysts, and information management specialists.
Disclaimer
CRISIL Limited has taken due care and caution in preparing this Report. Information has been obtained by CRISIL from sources, which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. CRISIL Limited has no financial liability whatsoever to the subscribers / users / transmitters / distributors of this Report. The Centre for Economic Research, CRISIL (C- CER) operates independently of and does not have access to information obtained by CRISIL's Ratings Division, which may in its regular operations obtain information of a confidential nature that is not available to C-CER. No part of this Report may be published / reproduced in any form without CRISIL's prior written approval.
CRISIL Privacy Notice
CRISIL respects your privacy. We use your contact information, such as your name, address, and email id, to fulfill your request and service your account and to provide you with additional information from CRISIL and other parts of The McGraw-Hill Companies, Inc. you may find of interest. For further information, or to let us know your preferences with respect to receiving marketing materials, please visit www.crisil.com/privacy. You can view McGraw-Hill’s Customer Privacy Policy at
http://www.mcgrawhill.com/site/tools/privacy/privacy_english.
Last updated: April 30, 2012
Analytical Contacts:
Ajay Srinivasan Vidya Mahambare Dipti Saletore Director, CRISIL Research Principal Economist Economist
Email: [email protected] Email: [email protected] Email: [email protected]
Media Contacts:
Mitu Samar Priyadarshini Roy
Head, Communications and Brand Management Communications and Brand Management Email: [email protected] Email: [email protected] Phone: +91 22 3342 1838 Phone: +91 22 3342 1812
CRISIL Ltd is a Standard & Poor's company CRISIL Limited
CRISIL House, Central Avenue, Hiranandani Business Park, Powai, Mumbai- 400 076, India Tel: +91 22 3342 3000 Fax: +91 22 3342 8088 www.crisil.com
