August 4, 2015

ICICI Securities Ltd | Retail Equity Research

RBI Action

WHAT’S CHANGED… CRR...........................................................................................................Unchanged at 4%

Repo Rate ............................................................................................Unchanged at 7.25%

SLR ......................................................................................................Unchanged at 21.5%

Status quo; monetary policy committee possible The RBI has maintained status quo as expected with the repo rate at 7.25%, post the front loaded rate cuts of 75 bps in FY16. The full impact of inadequate monsoon, inflation trajectory and Federal Reserve rate action will remain as major determinants for future rate cuts. Lending rates of banks have fallen 30 bps on an average vs. the 75 bps repo rate cut in a signal to banks to undertake further rate cuts. RBI has agreed with the Finance Ministry on the Monetary Policy Committee (MPC), under the framework unveiled in the Budget, according to the Governor’s commentary. The details may be announced later by the government.

Key policy statements….

Repo rate, CRR, SLR maintained at 7.25%, 4% and 21.5%, respectively

Therefore, the reverse repo rate under the LAF remains unchanged at 6.25% while the marginal standing facility (MSF) rate and the bank rate are at 8.25%

The central estimate for gross value added (GVA) growth in 2015-16 has been maintained at 7.6%

The RBI has revised its January 2016 inflation expectation at 6% that has been maintained with risks broadly balanced around the target

The government announcement on infusion of bank capital into public sector banks will help loan growth and, hence, transmission

The RBI has announced that at least one set of bank licenses (payment bank/small bank) be offered by August 2015 end

RBI Policy rationale “Significant uncertainty will be resolved in the coming months, including the likely persistence of recent inflationary pressures, the full monsoon outturn, as well as possible Federal Reserve actions. As the Reserve Bank awaits greater transmission of its front-loaded past actions, it will monitor developments for emerging room for more accommodation”

View: The RBI has highlighted its view on inflation and that the huge base effect will result in lower CPI close to 4% by August 2015. However, from September onwards CPI may have an upward bias on base effect waning. Also, RBI will start talking about the 2017 target from current 6% target of January 2016, in the near future. It is still worried about sustained hardening of inflation excluding food and fuel. Moreover, the full effects of the service tax increase from 12.3% to 14%, which took effect from June, will feed through over the rest of the year. We believe as front loading of rate cuts has already happened, rates may see southward movement at the fag end of 2015 or early 2016 unless the current policy structure changes onto monetary policy committee (MPC) formation which RB has also agreed.

Monetary Policy Update (August 2015)Benchmark - 10 year G-sec yield

7.5

8.0

8.5

9.0

Jul-1

4

Aug-

14

Sep-

14

Oct-1

4

Nov

-14

Dec-

14

Jan-

15

Feb-

15

Mar

-15

Apr-1

5

May

-15

Jun-

15

Jul-1

5

Yiel

d (%

)

Source: Bloomberg, ICICIdirect.com Research CPI inflation remains stable

11.2

9.9

8.8

8.0 8.3 8.6

8.3

7.5 8.

07.

76.

55.

54.

4 5.0 5.

55.

45.

34.

9 5.0 5.4

4.05.06.07.08.09.0

10.011.012.0

Nov

-13

Dec-

13Ja

n-14

Feb-

14M

ar-1

4Ap

r-14

May

-14

Jun-

14Ju

l-14

Aug-

14Se

p-14

Oct-1

4N

ov-1

4De

c-14

Jan-

15Fe

b-15

Mar

-15

Apr-1

5M

ay-1

5Ju

n-15

(%)

Source: Bloomberg, ICICIdirect.com Research

Research Analyst Kajal Gandhi kajal.gandhi@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com Vishal Narnolia vishal.narnolia@icicisecurities.com

ICICI Securities Ltd | Retail Equity Research

Page 2

With only a partial pass on in lending rate cuts by banks, the RBI has said that as and “when loan demand picks up in Q3 of 2015-16, banks will see more gains from cutting rates to secure new lending, and more transmission will take place”. We expect 10 year G-Sec yields to be range bound between 7.50% and 7.75%. However, volatility in global bond markets and US interest rate movements needs to be keenly watched. For the banking system, the reducing interest rate scenario is negative for margins in the short-term as reducing assets yields impact is felt immediately while the positive impact of a dip in deposit rates comes with a lag. With G-sec yields expected to remain range bound, treasury gains remain muted vs. strong gains seen earlier. Further on RBI’s stance for future rate cuts “Monetary policy actions will be conditioned by (a) fuller transmission by banks of the Reserve Bank’s front-loaded rate reductions into their lending rates; (b) developments in food prices and their management, especially the effects of the monsoon, while looking through both seasonal as well as base effects; (c) a continuation and even acceleration of policy efforts to unclog the supply side so as to make available key inputs such as power and land, as also repurposing of public spending from poorly targeted subsidies towards public investment and reducing the pipeline of stalled investment; and (d) signs of normalisation of the US monetary policy”

RBI’s outlook on Growth

"The outlook for growth is improving gradually. Favourable real income effects could accrue from weaker commodity prices, in particular crude oil, and a possible step-up in agricultural activity if monsoon conditions continue to improve. On the other hand, global growth projections for 2015 have generally been revised downwards. Therefore, the export contraction could become a prolonged drag on growth, going forward. Notwithstanding some improvement in the state of stalled projects, supply constraints continue to be binding and new investment demand emanating from the private sector and the central government remains subdued. On an assessment of the evolving balance of risks, the projected output growth for 2015-16 has been retained at 7.6% " Exhibit 1: Status quo on repo rate, CRR, SLR

0.01.02.03.04.05.06.07.08.09.0

Jun-

10A

ug-1

0Oc

t-10

Dec-

10Fe

b-11

Apr

-11

Jun-

11A

ug-1

1Oc

t-11

Dec-

11Fe

b-12

Apr

-12

Jun-

12A

ug-1

2Oc

t-12

Dec-

12Fe

b-13

Apr

-13

Jun-

13A

ug-1

3Oc

t-13

Dec-

13Fe

b-14

Apr

-14

Jun-

14A

ug-1

4Oc

t-14

Dec-

14Fe

b-15

Apr

-15

Jun-

15A

ug-1

5

(%)

Reverse Repo Repo rate CRR

Source: RBI, ICICIdirect.com Research

The fourth bi-monthly monetary policy statement will be announced on September 29, 2015.

ICICI Securities Ltd | Retail Equity Research

Page 3

RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093

research@icicidirect.com

ICICI Securities Ltd | Retail Equity Research

Page 4

Disclaimer

ANALYST CERTIFICATION We /I, Kajal Gandhi CA, Vasant Lohiya CA and Vishal Narnolia MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.

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