In line with our expectations, the Reserve Bank of India has raised the Repo rate by 25 bps to 8.50 per cent as it continued to target anchoring inflationary expectations despite concerns regarding risks to economic growth.

The lagged impact of cumulative monetary policy actions and moderating demand, notwithstanding the potential adverse impact of the rupee depreciation, incomplete transmission of commodity price movements, is expected to moderate inflationary pressures to around 6.8-7 per cent by March 2012.

Concerns regarding the moderation in domestic growth prospects that had prompted the RBI to revise the baseline growth projection to 7.6 per cent from 8 per cent, indicate that the monetary stance is intended to stimulate investment activity (as compared to the earlier intention to manage the risk of growth falling significantly below trend) and provide an explicit guidance indicating a low likelihood of a further policy rate hike in December 2010.

Thus after effecting 13 hikes since March 2010, we expect the RBI to take a pause and keep the policy rates unchanged in the rest of FY12, to balance anchoring of inflationary expectations with growth side risks, unless domestic or global economic growth displays a sharper than expected slowdown.

Deposit holders to gain

The decision to deregulate of the bank savings deposits rate (operational guidelines awaited) is likely to benefit the deposit holders as they can get higher returns on their deposits.

With saving deposits accounting for 22 -23 per cent of total bank deposits as on September 30, 2011, we estimate dilution in net interest margins by 10-12 basis points, (assuming a broad based 50-75 bps increase in the savings bank deposit interest rate; without factoring in any rise in lending rates) and the return on equity by around 1 per cent.

The impact could be more for banks that have a stronger savings account base. The deregulation of the savings rate and the transition towards Basel III guidelines in a phased manner (draft guidelines expected by December 2011) are likely to further intensify the competitive nature of the banking industry. 

(The author is MD & CEO, ICRA Ltd).

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