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The Reserve Bank of India (RBI) hiked the repo rate by 25 bps in the August 2018 Policy review, though it retained the neutral Monetary Policy stance. The various risks to the inflation trajectory that were highlighted, include both global factors, like volatility in prices of commodities and financial markets, as well as local factors like impact of the revised minimum support prices (MSPs) and that of potential fiscal slippage at the Central and state government levels. ICRA believes that depending on how the various factors play out, a final rate hike of 25 bps may emerge towards the end of FY2019, though we expect a pause in the October Policy review.

We also look at the banking sector wherein PSBs, which are not under the Prompt Corrective Action (PCA) framework, have been able to hold on to their market share in advances at around 50-51% in the last two years, despite being faced with asset quality pressures, dwindling profitability and capital constraints. Consequently, the market share gains of private sector banks have come entirely at the expense of PSBs that are under the PCA framework. However, private banks have been unable to gain significant market share in deposits, pointing to the strong deposit franchise strength of PSBs. ICRA expects that if this trend continues , private banks will have an incremental loan-to-deposit ratio of close to 100% during FY2019-20, and they may face issues in sustaining such a high loan-to-deposit ratio, given the SLR and CRR requirements. Accordingly, ICRA expects that the market share of private banks in terms of advances will stabilise at best at around 38-40% in the foreseeable future.

The telecom sector continues to witness growth in its wireless subscriber base as the same increased by 6 million in May 2018, taking the aggregate base to 1,131.0 million. The wireless broadband subscriber base too has continued on its strong growth trajectory, witnessing an M-o-M growth of 3% in May 2018. The growth potential in this space is immense. The top four telcos continue to consolidate their active subscriber base even as small players exit the space. This is expected to increase further, going forward.

Finally, Insight examines the impact of the revision in truck axle load norms on commercial vehicle volumes. The Government's decision to increase the truck axle load will limit the benefit on CV sales in the near term as overloading is a common phenomenon in India. In the long-term, CV sales would depend to a large extent on whether the norms would be expanded to cover the existing CV population. This said, the overall impact on the industry is uncertain and can only be ascertained when there is further clarity However, CV manufacturers and auto ancillaries are likely to shift towards the new norms without too many supply disruptions.

The issue concludes with the regular features: monthly rating updates, upcoming ICRA events, and news features related to the company.

I hope you will find this newsletter useful and informative.

Best Regards

Anjan Ghosh
Chief Rating Officer, ICRA Ltd

 
 
  From ICRA Research
   
  Inflation risks amid closing of output gap prompt back-to-back rate hike
 

With concerns related to various inflationary risks amid a narrowing of the output gap, the Monetary Policy Committee (MPC) voted 5:1 to hike the policy repo rate by 25 bps to 6.5% in the August 2018 Policy Review, as anticipated. In line with our expectations, the Committee retained the stance of the Monetary Policy at neutral instead of revising it to withdrawal of accommodation, which suggests that the future rate action would remain data dependant.

The headline and core (excluding food and beverages and fuel and light) CPI inflation had risen to a five-month high of 5.0% and a 47-month high of 6.4%, respectively, in June 2018. The MPC highlighted various risks to the inflation trajectory, which include global factors, such as the volatility in prices of various commodities and in global financial markets. Domestic concerns include rising inflationary expectations of households, the unfavourable distribution of the monsoon so far, and the likely impact of revised minimum support prices (MSPs) on prices of food items. Moreover, the Committee highlighted concerns regarding the impact of potential fiscal slippage at the Central and the state government level on market volatility, crowding out of private investment and the inflation trajectory. Based on such factors, the MPC finetuned its inflation projections to 4.6% for Q2 FY2019 and 4.8% for H2 FY2019, while placing its forecast at 5.0% for Q1 FY2020.

The Committee highlighted the fact that the output gap had virtually closed, amid healthy industrial and service sector activity, capacity utilisation, and business sentiment. Based on the progress of the monsoons and the revision in the MSPs of kharif crops, rural demand is expected to remain healthy. It remarked that investment activity remained firm, despite some recent tightening of financing conditions, and that rising FDI flows and buoyant domestic capital market conditions augured well for the outlook for investment activity. Nevertheless, the MPC highlighted some growth risks like the impact of escalating trade tensions on Indian exports as well as the concerns related to the effect of geopolitical tensions and higher crude oil prices on global growth.

Overall, the MPC retained its GDP growth projection for FY2019 at 7.4%, which builds in an expected easing from 7.5-7.6% in H1 FY2019 to 7.3-7.4% in H2 FY2019, with risks evenly balanced, while placing its GDP growth forecast for Q1 FY2020 at a higher 7.5%.

Depending on the impact of various risks on the evolving inflation outlook, a final rate hike of 25 bps may emerge towards the end of FY2019, particularly, given that the MPC’s inflation projection for Q1 FY2020 is at present placed at 5.0%, well above the medium-term target of 4.0%. However, there may not be enough clarity by the October 2018 Policy Review, on the impact of specific inflation risks such as the revised MSPs on the prices of kharif crops (with the harvest and procurement to take place in October-November 2018), to support a rate hike in that meeting.

   
  Non-PCA PSBs to retain market share in advances; deposit franchise continues to remain strong for PSBs
 

The advances market share of non-Prompt Corrective Action (non-PCA) public sector banks (PSBs) are expected to be maintained at 50-51% in advances while the private sector banks’ (PVBs) market share is expected to increase from 30.9% (as on March 31, 2018) to ~38-40% in the foreseeable future and stabilise at those levels. As per an ICRA note, with the expected resolution under the Insolvency and Bankruptcy Code (IBC), 2016, the asset quality for all PSBs is expected to improve over the next couple of years. The improvement in recoveries and the capital infusion by the GoI may help PSBs come out of the PCA framework and stabilise their market share, though at lower levels of 9-12%. Depending on the capital position, the PCA PSBs may pose competition for PVBs from FY2021 onwards, restricting their market share gains.

Despite being faced with lingering asset quality concerns, dwindling profitability and capital constraints, the non-PCA PSBs managed to hold on to their market share in advances at around 50-51% for the last two years. The PVBs were able to gain market share in advances to 30.9% as on March 31, 2018 from 25.8% as on June 30, 2016, primarily at the expense of PCA PSBs whose market share declined to 18.6% from 23.3% in the above-mentioned period.

Unlike the gain in the advances market share, the PVBs were unable to gain significant market share in deposits, given the strong deposit franchise of PSBs. As against an increase of 5.1% in the share of advances for the last two years, their increase in the share of deposits was lower, at 3.5%. Within the PSBs, non-PCA PSBs held on to their market share at ~52-53%, however, deposit market share of PCA PSBs declined to 21.9% as on March 31, 2018 from 25.1% as on June 30, 2016. The PVBs had a high 69% share of incremental deposits during the trailing 12 months ending March 31, 2018. This led to a rise in their market share to 25.8% as on March 31, 2018 from 22.3% as on June 30, 2016.

The loss of deposit share for the PCA PSBs was also driven by reducing bulk deposits, as reflected by an improvement in their current account and savings account (CASA) ratio to 37.6% as on March 31, 2018 from 29.6% as on June 30, 2016. Of this, the savings deposits increased to 31.1% (March 31, 2018) of total deposits from 23.7% (June 30, 2016). Accordingly, the core depositor base of the PCA PSBs appears to remain strong. On the other hand, though the CASA of the PVBs also increased from 38% to 46% in the above-mentioned period, however, the same is also supported by higher deposit rates being offered by many of them on savings deposits, apart from the increased reliance on bulk deposits. ICRA expects that it will be a tad difficult for the PVBs to poach the deposit customer base of PSBs, given their large branch network in rural and semi-urban regions.

ICRA expects the banking industry’s advances to grow 8-9.5% during FY2019 and FY2020, of which the PVBs are expected to hold ~77-80% incremental market share in advances, which will translate in their market share of ~38-40% by FY2020. For such growth in advances and assuming a 63-66% incremental market share in deposits for the PVBs shall translate into an incremental loan-to-deposit ratio of ~97-101% during FY2019-FY2020. Hence, the PVBs may face issues in sustaining such a high loan-to-deposit ratio, given the statutory liquidity ratio (SLR) and the cash reserve ratio (CRR) requirements of 19.5% and 4%, respectively unless they are able to improve their incremental share in deposits. Accordingly, we also expect that the advances market share of PVBs shall stabilise at best at 38-40% in the foreseeable future.

   
  Wireless subscriber base increases by 6 million in May 2018; wireless broadband sees strong subscriber growth
 

The wireless subscriber base in the country has increased by 6 million during the month of May 2018, taking the aggregate base to 1,131.0 million. In another positive for the industry, the wireless broadband subscriber base too has continued on its strong growth trajectory, witnessing an M-o-M growth of 3% in May 2018.

The growth in the subscriber base in May was led by Bharti, which added 35.9 million subscribers in May 2018, largely due to the migration of Telenor’s subscribers, post the completion of its merger with Bharti. On the other hand, RJio also continued to witness meaningful gains, adding 9.4 million subscribers in May 2018.

With the completion of Telenor’s merger, Bharti’s wireless subscriber market share has increased to 30.5% as of May 2018 as against 27.4% as of April 2018. Overall, the top four telcos[1] together have a subscriber base of 986.8 million, strengthening their combined market share to 87.2% as of May 2018 as against 83.9% as of Apr 2018. The total subscriber base of the remaining telcos has been declining – at 144.2 million as on May 2018 - as against 181.4 million as on Apr 2018. The situation appears even stark when seen in terms of active subscribers. The top four telcos hold 915.0 million active subscribers or 93.0% market share as of May 2018. This has increased from 90.7% as on Apr 2018 and is expected to increase further, going forward, marking a gradual waning away of the exiting telcos.

As per ICRA, another positive for the industry has been the fact that the wireless broadband subscriber base has maintained its strong growth trajectory, reporting an M-o-M increase of 3.0% in May 2018, supported by low tariff data plans offered by the telcos. Considering that wireless broadband subscribers still constitute only around 37% of the total wireless subscribers in the country, there is considerable growth potential in this segment and ICRA expects this segment to show healthy growth going forward.

[1] Bharti, Vodafone, Idea and RJio

     
  Revision in truck axle load norms to have limited impact on commercial vehicle volumes
 

In ICRA's view, the Government's decision to increase the truck axle load will effectively increase the load-carrying capacity in the system and the extent of benefit is likely to be limited, as overloading has been a common phenomenon in India. It is expected to adversely impact commercial vehicle (CV) sales in the near term.

However, certain segments of road transportation such as auto-carriers, consumer durables, containerised cargo are not likely to be impacted by the revised axle load norms as these remain constrained by volumetric dimensions.

Over the near term, retail sales are likely to be adversely impacted as uncertainties in the market abound with respect to the applicability of new norms to existing fleet population and the status of existing inventory in the system.

Overall, the long-term impact of the norms on the CV volumes in the country would depend to a large extent on whether the norms would be expanded to cover the existing CV population. Accordingly, the overall impact of the norms on the domestic CV industry remains uncertain and can only be ascertained when further clarity is received on the same. The impact will be more pronounced in goods carriers handling bulk commodities, while industry-specific applications like mining, auto-carrier, ODC segments are likely to be largely unaffected.

CV manufacturers and auto ancillaries are likely to shift towards the new norms without too many supply disruptions. With the existing vehicles manufactured being equipped to handle higher tonnage than the rated payloads, there is no likelihood of a material supply disruption, following a few cases of re-engineering.

     
 
           
 
   
Rating Updates for the month of July 2018
   
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