This document is being provided for the exclusive use of Himanshu Jhamb at Management Development Institute

No part of this Report may be published/reproduced/distributed in any form without CRISIL's prior written approval

Case builds for a rate cut

Another 25 bps cut in the repo rate this year appears likely, given some improvement in policy transmission, sharply low inflation and
recovery in growth
Also, money-market liquidity remains easy
Repo rate cut transmission to bank base lending rates sees some improvement in August

sluggish

A further reduction in policy rates by the Reserve Bank of India (RBI) may be at hand as the economy struggles to grow despite low crude oil
commodity prices, inflation falls further, and a rate hike by the US Federal Reserve now looks more imminent towards year-end.
The RBI had kept the repo rate unchanged at 7.25% in August, citing concerns over the monsoons, domestic economic growth and any policy
by the US Fed.

and

action

Delayed and diluted transmission of previous repo rate cuts into banks' lending rates is another worry for the RBI. Banks' base rates so far have hardly
come off 30 basis points (bps) average. By contrast, interest rates in money-market instruments are more market determined and plunged in response
to the RBI's liquidity management operations. However, a sharp reduction in HDFC Bank;s base rate (by 65 bps between January and August 2015)
suggests other lenders could follow suit.

Repo cut transmission to market interest rates

Source: RBI, CRISIL Research

Note: *average across maturities,***major10 banks, month-end

Liquidity conditions remain easy

There was surplus liquidity in August, but absorption was lower compared with July. Average daily net liquidity injection under the repo, variable term
repo and marginal standing facility (MSF) was higher at Rs 67 billion in August compared with Rs 59 billion in July, whereas net absorption was lower
at Rs 102 billion compared with Rs 192 billion. The month saw higher infusion under the repo and MSF windows, while absorption was higher under
the term reverse repo window.

Demand for liquidity:

Higher government borrowing via dated securities partly offset lower borrowing via treasury bills in August compared with July.

Borrowings via dated securities rose to Rs 700 billion compared with Rs 590 billion
Borrowings via treasury bills fell to Rs 738.9 billion compared with Rs 908.2 billion
Bank credit demand remained relatively low and sticky at 9%
Currency in circulation with the public grew 10.4% in August compared with a 9.6% rise in July

Supply of liquidity:
Deposit growth is improving - up 11.3% in August versus 11.2% in July - though it is lower than last fiscal
Government spending rose, as reflected in a fall in its surplus cash balances with the RBI to Rs 132 billion as of August 28 compared with

Rs

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No part of this Report may be published/reproduced/distributed in any form without CRISIL's prior written approval

294.2 billion as of August 14.

As liquidity surplus reduced slightly in August, weighted average call and term repo rates remained relatively sticky at 6.9% and 7.3%, respectively.
Money-market rates too fell at a slower pace in August - on certificates of deposits (CDs), they fell 15 bps average across maturities compared with 20
bps fall in July, while those on commercial paper (CPs) rose about 30 bps.

Money-market interest rates turn rigid as liquidity surplus declines

Source: RBI, CEIC, CRISIL Research

Credit growth stays dull

Bank credit growth remained sticky at a low 9% in July and August, compared with nearly 11% in the same period last fiscal. Muted investment growth,
rising risk aversion owing to public sector banks' non-performing asset (NPA) worries and businesses' proclivity to raise cheaper funds via commercial
paper is weighing on bank credit growth.
By contrast, deposit growth has been rising gradually, but the 11.3% spurt this August was lower than in the same month a year ago - at 13%. Higher
deposit growth relative to credit growth translated into a credit-deposit ratio of 74.4% as on August 21, 2015, which is 160 bps lower on-year.
Meanwhile, borrowings via CP and CDs remain high given lower interest rates.

Bank credit offtake remains sluggish; resort to money market instruments high

Source: RBI, CEIC, CRISIL Research

Outlook
We believe the odds are high for a further 25 bps cut in the repo rate in 2015, given some improvement in policy transmission, sharply low
amid lower crude oil prices and slow recovery in growth.

inflation

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We expect bank credit to grow 13-15% this fiscal compared with 12.2% in 2014-15. The pick-up, most of which is expected in the second half, is likely
to be driven by auto and home loans, public sector units planning to undertake investments and small-scale enterprises. We expect deposits to grow at
the same rate as credit offtake compared with 12-13% in 2014-15 as economic growth picks up along with discretionary spending amid low inflation.
As for banks, their gross non-performing assets are likely to inch up to 4.7% by close of 2015-16, from 3.8% of advances as on March 31, 2014 and at
4.5% by end 2014-15 due to lower asset sales to asset reconstruction companies and high slippages from restructured assets.