The Banking and Strategy Initiative

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Bank Policy Tuesday: India Governor(sic!) takes extreme steps to shore uneven policy

Inflation rate world

Inflation rate world (Photo credit: Wikipedia)

With the forced liquidity constraints as the currency devolved on the nation in June ( after May 21 announcement) RBI was stuck in the middle of a rate cut leg of its policy to encourage growth. Already hampered by banks using Central Bank liquidity to the extent of INR 2 Tln instead of market, the Central bank’s rate hike consequently in September even as the MSF hikes were redacted and brought back to the normal line may finally break the back of the markets on the verge of a bullish move from 6200.(This wa s however averted as Emerging market EEMs brought in a fresh wave of continuing liuidity and that confidence was behind a smart close to the day post-policy, market well  prepared otherwise)

The only inflation out of control however is the Food inflation which may not respond to any rate hikes and this rate hike may just be a mechanistic response continuing since Duvvoori Rao demitted office to stabilise the higher rate environment, in which case India may hold these levels for a good six months, and in developed markets this new intermediate leg could have lasted years, till the rate cuts can begin again.

Meanwhile consumer staples will continue to see large double digit price increases to correct 2-3 years of suppressed marketing budgets and pricin pressures unrequited to keep basic sales growth alive in consumer markets

The announced policy steps however will increase bank rates and as retail lending has rebounded such increases are largely going to be absorbed by consumers and however will have had debatable impacts on fueling furthr inflation now controlled by bank rates. NBFC business is already looking better in consumer durables with a clampdown on 0 interest loans and while that may not segment the market in favor of first time durable buyers that have been an absent quantity fooling marketers and policymakers, it will continue to better control the negative output gap with more advantages for NBFC lending even for banks that have already relied a fair portion of their portfolio on the sector at the expense of obviating the real winning consumer sectors or industry sectors winning n the changed scenario While bnks are hastrung to raise deposit rates despite the remit from the Central Bank ( to issue as many interest payments as they like instead of quarterly and the rate s already free) also with inflation indexed bonds resented to retail investors. Banks relying on wholesale funding also may be unable to reduce lending rates despite the climbdown from emergency iquidity measures to MSF of 8 3/4 % and a further climbdown as inflation stabilises to 7 3/4%

RBI hiked rates 25 bp and MSF channel has returned to 100 bp over the repo rate clearing the path for a return to the Repo rate as the Bank rate.

Decks have in the meantime been cleared for Foreign investors to directly own a piece of the Indian Banking action with Foreign banks allowed to come in thru M&A ( smaller private Banks like Federal Bank and SIB as targets) and the Governor’s recent visit to USA (his alma mater being U Chicago) reminding Foreign banks that branch structure is accepted as a bonafide means of existence in India without being compelled to WOS but that has nary been a scratch on investors till now. Markets have returned to glory post policy as no excessive shorts were built up in response to the rate hike and the Economic recovery is expected to set in post elections 2014 (May)

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