SBI ( State Bank of India )-Largest Bank Reports $5mn in Q4 PAT; Provisions & W/offs are not one time they will increase as interest rate hikes continue

Banking-Inflation, Interest Rates lead to NPAs/Bond Losses and Totally Useless Labour-functional and retired ADDs to Costs

None of these factors are one time events and will get repeated frequently over the next two years. And while annual inflation marginally eased in Apr '11 due to a favorable base, the monthly rise in the WPI was fairly steep and broad-based. We expect inflation in the 8-10% range in 1HFY12. The RBI is likely to raise repo rate by 25bps on 16 Jun '11.

High base leads to marginal softening. The annual inflation (based on the wholesale price index) marginally eased to 8.66% in Apr '11,

higher than consensus and our expectations. Feb '11 WPI inflation was revised to 9.5% from 8.3% earlier. 

Price pressures from all corners. The price indices for primary articles, fuel and manufactured products jumped 2.2%, 1.1% and 1% (m-o-m) respectively in Apr '11. Moreover, all 12 sub-categories of manufactured products witnessed steep rise in their respective indices in Apr '11. 

Softening core inflation. The core inflation - non food & non fuel - eased to 7.9% in Apr '11 from 9.2% in Mar '11. Also, non-food manufactured products inflation - an indicator of demand-side and generalized pressures on inflation - eased to 6.3% in Apr '11, coming off from 7.4% in Mar '11. 

Inflation assessment and outlook. Despite a bumper winter (rabi) crop, food article prices continued to rise in Apr '11. Prices of manufactured products have also been sharply rising since Jan '11. In addition, though the impact of the recent petrol price hike on overall inflation is marginal (8bps), the likely hike in diesel prices will have considerable impact on inflation. If diesel prices are increased by `2/litre, inflation would be directly pushed up by 28bps followed by an indirect impact of a similar magnitude. Thus, the inflation is likely to remain elevated in 1HFY12 (in the 8-10% range). Thereafter, the rising interest rate trend globally and the end of the QE-2 in the US in Jun '11 are expected to bring down global commodity prices. This would help soften imported inflation in India. Moreover, the aggressive policy tightening by the RBI and a likely good monsoon would soften domestic inflation from current levels. 

Policy outlook. Despite some softening in Apr '11, inflation continues to be considerably above the RBI's comfort zone of 4-5% for the past 17 months. The aforementioned factors rule out an immediate softening of inflation. In view of this, we expect the RBI to raise the repo rate by 50bps in remaining-FY12e, of which 25bps hike is expected on 16 Jun '11.

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