September 2015

CRISIL Monetary Policy Review

50 bps it is! Will the RBI pause now?
Policy Brief: In a surprise move, the Reserve Bank of India (RBI) cut its repo rate by 50 basis points (bps) to 6.75%.
The extent of the slash was unanticipated, but its timing was in line with our view that sufficient clarity on monsoon,
pace of economic recovery and a likely delay in the policy rate hike by the US Federal Reserve will open up room for a
repo rate cut in September. On Tuesday, the RBI said a bulk of the conditions required for further accommodation
flagged in its previous monetary policy review -- have been met. The RBI lowered its GDP growth forecast by 20 bps to
7.4% (CRISIL GDP growth forecast, too, is 7.4%) and its January 2016 inflation forecast to 5.8% from 6% estimated
last month. In addition, it has allowed for a gradual increase in the limit on foreign portfolio investments in central and
state government bonds. Also, the ceiling for bank investments under the held-to-maturity category will be reduced over
time from 22% to 21.5%.
Our view: The RBI has cut the repo rate by 125 bps since it first started lowering the rate in January this year.
With inflation within target, continued windfall from lower global oil and commodity prices, postponement of the rate hike
by the Fed, and the need to push up pace of domestic demand recovery prompted the RBIs move. The onus is now
on the government to remove impediments to transmission while following a prudent fiscal path, and for banks to pass
on the rate cut. The RBIs policy will remain accommodative but it will maintain caution in terms of demand-side
pressures on inflation that could arise from the Seventh Pay Commission payout expected in the next two fiscals. Plus
the RBI has also set the CPI inflation target at ~5% by end 2016-17 and reiterated it at 4% by end 2017-18. Therefore,
the pause from hereon could be a prolonged one unless there is a significant positive surprise on inflation.
Table 1: Where the inflation pressure comes from
Weighted average inflation rate (%)

Items with
Aug CPI

No. of
items

Total weight
in CPI (%)

Apr-15

May-15

Jun-15

Jul-15

Aug-15

> 6%

116

31.1

8.4

8.8

9.5

8.9

10.3

0 to 6%

151

55.2

4.8

4.8

5.0

4.3

4.1

< 0%

31

13.7

-3.2

-2.4

-2.1

-8.1

-10.7

Source: RBI, CRISIL Research

Benign conditions create room for the sharp rate cut: Inflation is expected to pick up after August as a favourable
base effect wears out (see our view), but it will remain within the RBIs 6% target by January 2016. We believe inflation
will average 5.4% in the current fiscal compared with 6% in the last. So far this fiscal, inflation has been benign
because rising prices of pulses and onions have been offset by a sharp decline in global oil and commodity prices and
continued sluggishness in demand conditions (Table 1). The fall in global prices even offset the impact of a depreciating

CRISIL Monetary Policy Review

currency (Table 2). Besides, a fall in capacity utilisation to a 5-year low, damage to farm income and weak growth in
non-farm income suggests that recovery in consumer demand is slow. As a result, core inflation has been falling.

Above 6% inflation This category recorded weighted average inflation of 10.3% in August, up from 8.4% in
April 2015. The major items that have contributed to inflation here are onions, tur (arhar),
tuition/school/education fees and cooked meals.

0-6% inflation - A majority of items in the CPI basket are included here. Inflation in this category was 4.1% in
August, compared with 4.8% in April. The major items with higher inflation rates included house rent, milk,
medicines and electricity.

Below 0% inflation - A much smaller proportion of items saw inflation in the negative zone but for these the
factors were a mix of global price declines (gold, petrol, sugar) and high base effect of last year (tomato, potato).
Inflation in this basket was -10.7% in August, down from -3.2% in April.

Table 2: Global price declines offset rupee depreciation

Dependence (imports as % of

Global price fall

total domestic consumption)

(Apr-Sep 2015, %, y-o-y)

88.0

-46.9

Steel

10.0

-30.9

Aluminium

40.0

-10

Copper

11.6

-16.6

Coal (coking)

72.0

-18.3

Gold

94.5

-10.3

27.2

-17.3

0.0

-28.6

62.0

-20.3

6.7

Commodity
Crude oil
Metals

Agricultural
Cereals
Sugar
Oilseeds
Rupee / US$

Source: RBI, Ministry of Agriculture, CRISIL Research

A favourable mix of global factors, steps by the government control fiscal deficit, restraint shown when raising minimum
support prices, and checks on hoarding have reined in overall food inflation despite two consecutive monsoon failures.
But we cannot bank on such a benign convergence of events to curb food inflation in future. The larger issue related to
food inflation is low farm productivity, wastage, and high vulnerability of agriculture. Its necessary to address these for
a durable fix on food inflation. This will warrant caution on the part of the RBI while deciding on further rate cuts.

Increase in foreign portfolio investment will enable further investments

The move to increase limits on foreign portfolio investment in debt securities and also fix the same in rupee terms (as
against the dollar currently) provides more headroom for foreign investments in government securities (G-Secs), as
existing limits have almost been exhausted. The RBI will be increasing the limits in central government securities in
phases to 5% of the outstanding stock by March 2018. Overall, this is expected to make room for additional investment
of Rs 1,200 billion in the limit for central government securities by March 2018 over and above the limit of Rs 1,535
billion for all G-secs. There will be a separate limit for FPI in State Development Loans (SDLs), which is proposed to be
increased in phases to reach 2% of the outstanding stock by March 2018. This would amount to an additional limit of
about Rs 500 billion.

Figure 3: Debt utilisation status as on September 28, 2015

Type of Instrum ent

Upper Cap (USD

bn)

Upper Cap (INR

Cr.)

% of lim its
exhausted

Government Debt (auction)

25

124,432

99.77

Government Debt (on tap)

29,137

100.08

51

244,323

76.21

Commercial Paper (Fresh Investments not

permitted w .e.f. February 4, 2015)

9,978

18.19

Credit Enhanced Bonds

23,953

Corporate Debt

Source: NSDL

33

CRISIL Monetary Policy Review

Bank credit growth to gather steam in latter half of
2015-16

Aggregate bank credit growth declined marginally to 9.11

% y-o-y as on September 4, 2015, from 9.40% in the last

Figure 1: Credit growth (y-o-y)

18%

16%

fiscal. Poor monsoon, muted investments, rising risk

aversion owing to deteriorating asset quality of public-

14%

sector banks (PSBs), and an increase in cheaper funds

raised via commercial paper ( rose by 40% y-o-y as on

12%

September 15, 2015) slowed credit off-take.

driven by a rise in retail loan (automobile and home loans),

Sep-15

Jul-15

May-15

Mar-15

Jan-15

Nov-14

We expect a gradual pick-up in the latter half of 2015-16,

Sep-14

Nov-13

Jul-14

8%

11% in July 2014.

May-14

was a dismal 5.6% y-o-y as of July 2015, compared with

10%

Mar-14

Corporate off-take was the most affected, where growth

Jan-14

Source: RBI, CRISIL Research

public-sector investments (which will in turn drive-up

working capital demand across allied sectors) and smallscale enterprises. Overall, credit growth is projected to
increase to 13-15% in 2015-16 vis--vis ~12.2% in
2014-15.

Figure 2: Commercial paper issuances rise (y-o-y)

140%
120%
100%

80%
60%
40%
20%
0%
-20%

Sep-15

Jul-15

May-15

Mar-15

Jan-15

Nov-14

Sep-14

Jul-14

May-14

Mar-14

Jan-14

Nov-13

-40%

Source: RBI, CRISIL Research

Deposits growth also to accelerate

Bank deposit growth slowed to 11% y-o-y as on September

4, 2015, compared with 13.37% in last fiscal, because of
lower demand for funds as well as a high-base effect created
by a surge in foreign currency non-resident (FCNR) deposits

Figure 3: Deposit growth, y-o-y

20%
18%
16%

during October-December 2013.

Deposits are forecast to increase 13-15% in 2015-16,

compared with a 12.6% rise in 2014-15, backed by an
expected pick-up in economic growth and higher disposable

14%
12%
10%

income on account of low inflation.

Source: RBI, CRISIL Research

Sep-15

Jul-15

May-15

Mar-15

Jan-15

Nov-14

Sep-14

Jul-14

May-14

Mar-14

Jan-14

Nov-13

8%

CD ratio to increase in second half of 2015-16

Credit-deposit (CD) ratio stood at 74.2% as on September

85%

4, 2015, down 130 bps compared with September 5, 2014,

80%

owing to slowing credit growth.

Figure 4: Trend in CD ratio

While credit demand will pick up slightly in the second half

75%
70%

of 2015-16, deposits will grow moderately. We, therefore,

expect the CD ratio to remain stable at 75-77% in 2015-16.

65%
60%
55%

Incremental credit-deposit ratio

Sep-15

Jul-15

May-15

Mar-15

Jan-15

Nov-14

Sep-14

Jul-14

May-14

Mar-14

Jan-14

Nov-13

50%

Credit-deposit ratio

Source: RBI, CRISIL Research

Asset quality to remain weak

Gross non-performing assets (GNPAs), at 4.3% of

Figure 5: Trend in asset quality

(per cent)

advances as of March 2015 have increased significantly

7.0

from 3.8% in March 2014. As of June 2015, PSBs reported

6.0

6.1
5.1

GNPAs of 5.47% (83 bps higher y-o-y). The asset quality

of private sector banks, though, was relatively robust, with
GNPAs of 2%.

5.0
4.0

6.0

4.3

4.3

4.5

3.8

3.7
3.3
2.9

In 2015-16, CRISIL expects sales to ARCs to be Rs 60

billion compared with an estimated sale of Rs 160-170

Gross NPAs (%)

March 16 F

standard accounts.

2.0
March 15

(ARCs) and high slippages mainly from restructured

March 14

account of lower sales to asset reconstruction companies

3.0

March 13

In 2015-16, GNPAs is estimated to inch up to 4.5% on

March 12

Weak assets (%)

billion in 2014-15 due to regulatory policy changes

E: Estimated; F: Forecast

requiring more capital.

Weak assets = reported GNPA + 35% of outstanding

restructured advances (excluding state power utilities) + 75%
of investments in security receipts + 15% of loans structured
under the 5/25 scheme
Source: RBI, CRISIL Research

55

CRISIL Monetary Policy Review

NIMs to decline marginally in 2015-16

Figure 6: Net interest margins

Despite the 75 bps cut in the repo rate since

(per cent)

January 2015, we have seen lending rates decline

3.5

only by a gradual 30 bps, given higher risk aversion

and pressure on banks interest income growth.
HDFC bank is the only bank, which has cut its base

3.2

2.9

rate by 65 bps.

With a further 50 bps cut today, we expect banks to

gradually cut their lending rates and push credit

2.6

2.3

growth as the economic scenario and capital

While net interest margins (NIMs) of PSBs fell by 9

Jun-15

Mar-15

Dec-14

Jun-14

Sep-14

Mar-14

Dec-13

Jun-13

Sep-13

Mar-13

Dec-12

Jun-12

Sep-12

Mar-12

Dec-11

months.

Jun-11

reduce their lending rate by 30-40 bps in the coming

2.0

Sep-11

availability for PSBs improves. We expect banks to

Source: Company reports, CRISIL Research

bps y-o-y in 2014-15, those of private sector banks

expanded by 8 bps, led by lower interest expenses
arising from a favourable liability mix and higher CD
ratio.

NIMs are expected to be marginally lower in 201516, on account of lower yields and higher GNPAs
(especially of PSBs).

Reduction in SLR will improve funds availability

We believe the impact of bringing down the ceiling under Held to maturity (HTM) from 22% to 21.5% will be minimal.
The decision to reduce Statutory Liquidity ratio (SLR) and HTM ceiling by 0.25% every quarter till March 2017 (starting
from January 9, 2016) will potentially help release around Rs 250 billion funds every quarter until March 2017. However,
due to lack of adequate lending opportunities, banks are currently investing close to 27% of their net demand and time
liabilities in SLR securities, which is way higher than the regulatory requirement of 21.5%.

Analytical Contacts:
Dharmakirti Joshi

Ajay Srinivasan

Dipti Deshpande

Chief Economist, CRISIL Research

Director, CRISIL Research

Senior Economist, CRISIL Research

Email: dharmakirti.joshi@crisil.com

Email: ajay.srinivasan@crisil.com

Email: dipti.deshpande@crisil.com

Media Contacts
Tanuja Abhinandan

Jyoti Parmar

Media Relations

Media Relations

Email: tanuja.abhinandan@crisil.com

Email: jyoti.parmar@crisil.com

Phone: +91 22 3342 1818

Phone: +91 22 3342 1835

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