Monetary Policy 2QFY11

Monetary Policy 2QFY11
02 November 2010
IFIN: IFCI Financial Services Limited

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02 November 2010
Repo and Reverse repo rate hiked by 25 bps
Cautious on building up of structural inflation. Repo and reverse repo rate hiked by 25 bps
•CRR remained unchanged at 6.0%
•Bank rate remained unchanged at 6%
• Repo rate hiked by 25 bps to 6.25% on immediate basis
• Reverse repo rate unchanged at 5.25% on immediate basis.
•SLR remained unchanged at 25%
Impact : In order to contain inflationary condition , RBI increased its repo and reverse repo rate by 25 bps with
immediate effect. We believe the process of rate hike has entered its last phase. Further rate hikes is applicable only
if higher inflation persist for a longer run (Esp. in non food articles) . Any further immediate rate hike will increase
capital flows in the country which may lead to disruption in foreign exchange management .

02 November 2010
RBI stance
RBI remained hawkish : Concerns on inflation
• GDP growth projections are maintained at 8.5%.
• Projects inflation at 5.5 % from 6.5% earlier. Revision mainly on account of revision in WPI data series
• RBI reiterated its concerns on inflation which started with food price inflation and now has turned into
structural inflation. However RBI maintains that inflation will subside by March 2011 .
• Money supply growth projection maintained at 17% as central bank has witnessed sharp uptick in credit and deposits
accretion.
• Non Food credit growth also maintained at 20% YoY. Significant pick up in credit demand in recent weeks led to
unchanged projection on credit growth

02 November 2010
Concerned on rising asset prices

Higher provisioning for home loans
• Standard provision on home loans given on teaser rates increased to 2% ( from 0.4%). Teaser rate are lower fixed
interest rates (8-9%) given to home loans customers during initial (2 to 3 years) years
•Since August 2009 SBI is main player in home loan segment and contributes ~25% of total home loans segment.
•SBI launched its teaser home loan rates in August 2009 and disbursed around Rs 120 bn of home loans.
•Assuming all the home loans are given on teaser rate we see ~ Rs 2 bn impact on SBI profitability due to higher
provisioning (~1.2 % of annual profits).
•We do not see any major impact on any bank’s profitability due to higher provisioning (Impact in range of 1-2 %)
• Loan to value ratio in respect of banks exposure to home loans have been capped at 80%. Current industry average
is 70%.
• Risk weights for loans above Rs 7.5 mn increased to 125% from 100% earlier . No major impact as average ticket size
is in range of Rs 1 mn – 2.5 mn

02 November 2010
Other measure
•Changes in housing loans norm for UCB (urban co-operative banks)
• Placing a limit of 10% of total assets for loans to housing , real estate and commercial real estate (from 15% of
total deposits).
• Additional 5% will be available for home loans to individuals for loans upto Rs 1 mn
•Exempted UCB s, which maintains 12% CAR on a continuous basis, from mandatory share linking norms.
•Capital Adequacy norms for Financial Conglomerate made stringent:
•Definition for significant influence/ investment in a subsidiary revised to 20% (30% earlier).
• Entire equity investment in subsidiaries with significant influence shall be deducted from capital (if not
consolidated for capital purpose) . 50% to be deducted from Tier 1 capital and 50% from Tier 2 capital.
• These are considered for computing capital adequacy purpose of a standalone bank.
• RBI is finalising a detailed guidelines on inter bank and intra bank transactions and exposures.
• Draft guidelines on new banking licences will be placed on Jan 2011 for public comments. We belive final guidelines
to be placed in March 2011.

02 November 2010
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Monetary Policy 2QFY11 - 02 Nov 2010 (IFIN)

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IFIN: IFCI Financial Services Limited

Repo and Reverse repo rate hiked by 25 bps

•CRR remained unchanged at 6.0%

•Bank rate remained unchanged at 6%

• Repo rate hiked by 25 bps to 6.25% on immediate basis

• Reverse repo rate unchanged at 5.25% on immediate basis.

•SLR remained unchanged at 25%

IFIN: IFCI Financial Services Limited

RBI remained hawkish : Concerns on inflation

• GDP growth projections are maintained at 8.5%.

IFIN: IFCI Financial Services Limited

Concerned on rising asset prices

IFIN: IFCI Financial Services Limited

IFIN: IFCI Financial Services Limited

IFIN reports are also available on the Bloomberg [IFCI <GO>]

IFIN: IFCI Financial Services Limited

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