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Economy and Interest Rates

This presentation discusses the current state of the economy and interest rates, highlighting GDP growth, RBI monetary policy, liquidity conditions, inflation concerns, and the outlook for interest rates.

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Economy and Interest Rates

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  1. Economy and Interest Rates 31st Meeting of CEO’s of HFCs Presentation by Mr. KekiMistry Vice Chairman & CEO – HDFC February 18, 2011

  2. GDP registering consistent growth • Quarter Ended Sep 10- GDP growth at an impressive 8.90% (highest in any quarter in the last 3 years)-driven mainly by farm and services sector • Manufacturing growth slowed down - expected to slow down further • GDP expected to grow at about 8.6% during the FY 2010-11

  3. RBI Monetary Policy Review – January 25, 2011 • Liquidity and Inflation are RBI’s primary concerns • Key actions in Monetary Policy on Jan 25, 2011 • Reverse Repo & Repo increased by 25 bps to 5.50% & 6.50% • CRR retained at 6.00% • Temporary reduction of SLR from 24% to 23% of NDTL extended till April 8, 2011 • March 2011 Inflation target revised from 5.5% to 7% • Stance of the policy • Contain the spill-over of rise in food and fuel prices to general inflation • Rein in inflationary expectations • Moderate enough so as to not disrupt growth • Provide comfort on liquidity management • Credit growth at 24% against projection of 20% - growth is broad based across sectors and not just infrastructure. Housing including PSL growth was at 13.2% • Current Account Deficit at 3.7% of GDP a cause of concern

  4. Tight Liquidity conditions persist Source: Reuters • Liquidity shortfall of around Rs 60000-90,000 cr in the system; peak shortage of Rs 1,70,485 cr on Dec 22, 2010. • Liquidity expected to tighten further in March 11-High level of bank CDs maturing in March 11

  5. Projection of system liquidity Projected average shortfall till March 2011 : approx Rs 62,000 cr Projected govt spending from now till March 2011 : approx Rs 108,000 cr Source: J P Morgan Chase Bank

  6. Systemic Liquidity Shortage • High cash surplus lying with govt after 3G/BWA outflows-Currently at Rs.114290 crores • Increase in currency in circulation - 3.4% higher than PY • Higher government spending in rural areas – (NREGA USD 9bn) • High Credit Deposit Ratios causing a drain on banking system liquidity • Currency with public at INR 888,120 crs (as on 28/01/2011) against Rs 768,033 crs (as on 31/03/2010) Source: RBI

  7. Deposit Growth trailing Credit Demand • Has added to liquidity pressures • RBI in its recent credit policy, reiterated that rapid credit growth without commensurate increase in deposits not sustainable • Approx 4 % credit growth is on account of credit offtake for 3G/BWA auctions Source: RBI

  8. Inflation remains worrisome • WPI eased to 8.23% in January 2011 (8.43% in December 2010) • Food Inflation eased to a 7-week low of 13.07% for the week ended 29th Jan 2011 (17.05% in the previous week) • RBI’s inflation projection increased to 7% (from 5.5%) by March 2011 Source: Bloomberg

  9. Inflation : Food Vs Manufacturing

  10. IIP growth continues to be volatile • IIP at a low of 1.6% in Dec 10 (down from 3.6% in Nov & 11.3% in Oct) • High base effect coupled with contraction in mining and capital goods sector • IIP numbers to remain volatile Source: Bloomberg

  11. Rupee in the range of 45-48 • Factors supporting a strong Rupee • Robust domestic growth • Favourable Interest Rate differentials • Easy global liquidity augurs well for FII inflows • Risks • Widening Current Account Deficit 3.7% of GDP in H1 of FY 11 (as against 2.2% in PY H1) • Higher Oil Prices • FDI flows slowing down , FII flows volatile and vulnerable to external factors • Global Event risk – euro-zone sovereign crisis • In the short term, INR is highly correlated to movements in the equity market indices

  12. FII & FDI flows in India • Total FDI /FII flows of USD 58 bn in 2010 –all time high • Net accretion in Fx Reserves Jan 10 till date : USD 13.81bn Source – SEBI website/ Min of Com website

  13. Interest Rate Outlook • Rate hikes of 150 bps in repo and 200 bps in reverse repo by RBI in FY 11 till date - another hike possible in March 2011 • Tight liquidity conditions - Call rates average 6.62% since Jan 2011 • Most banks have hiked their Base Rates thrice since July 2010. Overall increase by 125 bps - 150ps. Most Base Rates in the range of 9%-9.5% • Similar increases in the PLRs of banks • Short end rates continue to increase, yield curve has inverted • Higher inflation can lead to future rate hikes • Domestic and Global food prices • Global commodity prices • Demand side pressures – wage inflation

  14. Movement in cost of funds * Typical for a AAA borrower

  15. Movement in AAA borrowing rates Commercial Paper (CP) Source: Reuters

  16. Movement in AAA borrowing rates Term Borrowings (NCD) Owing to sharp increase in short term rates, interest rate curve has inverted Source: Reuters

  17. Movement in G-Sec Rates Source : Reuters

  18. Implications for HFCs • Bank loans are a key source of funding for HFCs. Frequent changes in Base Rates by banks makes the funding cost volatile. • Since the implementation of Base Rates w.e.f. July 1, 2010, the cost of bank funding has gone up by 3%-3.5% • Special dispensation of home loans upto Rs 20 lacs qualifying as priority sector for refinance from banks has come to an end on March 31, 2010 . Current limit : Rs 5 lacs for indirect finance • Banks have been raising deposit rates since December 2010 , translating into higher cost of deposits for HFCs • Need to look at alternate sources of funding for HFCs

  19. Some suggestions • NHB may look at providing a short term liquidity facility to HFCs against their loan assets and investments • Housing loans qualifying as Priority Sector under indirect finance from banks be increased to Rs. 20 lacs from the current limit of Rs. 5 lacs • Tax Saving Bonds : Housing may be accorded ‘infrastructure’ status to facilitate issue of tax savings bonds • Priority Sector bonds : Revised RBI guidelines require banks to lend priority sector loans co-terminus with the underlying home loans. Banks find it difficult to lend for longer term due to ALM risks. Issue of priority sector bonds by HFC’s will help the banks to generate liquidity and also address ALM issues ……..contd

  20. Some suggestions Public deposits • Currently, HFCs can offer a maximum period of 84 months on public deposits • This limit may be revised to 10 years in order to enable HFCs to attract funds from institutional investors such as provident/pension funds, Army/air force group insurance which invests in longer durations External Commercial Borrowings • Infrastructure companies can now access ECBs • HFCs be allowed to access ECBs as it will open up a new source of funding • Can be approved on a fully hedged basis, so that HFCs are not open to forex fluctuation risk Perpetual debt • HFCs be permitted to raise upto 15% Tier I capital by way of perpetual debt

  21. Thank you

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