Increase in capacity utilisation is positive for stocks in the Indian manufacturing sector
Narnolia Financial Advisors
As expected, RBI kept the repo rate unchanged on December 5 and maintained its "calibrated tightening" stance. More importantly, inflation outlook for H2FY19 has been reduced to 2.7-3.2 percent from 3.9-4.5 percent earlier. Also, the inflation forecast for H1 FY20 has been reduced to 3.8-4.2 percent from 4.8 percent earlier.
Such sharp reduction in inflation forecast, along with lower Q2FY19 GDP growth, creates a strong case for a rate cut. However, the central bank decided to pause due to core inflation remaining above 6 percent and some inflationary concerns due to the possibility of slippage in the fiscal deficit.
RBI has also not factored in a fall in oil prices as sharp volatility recently makes predicting oil prices difficult, particularly ahead of the all-important OPEC meeting. But looking at various domestic as well as global macroeconomic factors, a long pause seems likely. Also, a moderate rate cut cannot be ruled out.
The bond market's immediate reaction also suggests a benign interest rate environment ahead. After the policy announcement, the 10-year benchmark bond yield fell to below 7.5 percent. RBI Governor Urjit Patel said in the press conference that there was space for commensurate policy action if the upside inflation risks didn’t materialize.
Falling bond yields will be very positive for banks as they would make mark to mark gains on their bond holdings. Also, a falling interest rate will improve their net interest margins to some extent, considering they have been under pressure in recent times.
Another positive of the policy is RBI keeping GDP growth rate for FY19 unchanged at 7.4 percent as RBI has signaled a sign of investment revival. Even Q2FY19 corporate results and management commentary has hinted the same.
Capacity utilisation, measured by the Reserve Bank’s Order Books, Inventories and Capacity utilization Survey (OBICUS), increased from 73.8 percent in April-June to 76.1 percent in July-September, which was higher than the long-term average of 74.9 percent. This is very positive for the Indian manufacturing sector related stocks along with corporate lenders.
Though the policy does not offer any immediate relief to struggling non-banking finance companies, a gradual reduction in SLR for banks will help improve the system liquidity.
There are series of important events ahead like OPEC meeting, state election results, US Fed policy, so the market direction in the near term will be more a net result of all these important events instead of RBI credit policy alone. But based on this policy, corporate lenders and manufacturing sector stocks would be outperformer.
The author is Chief Investment Officer at Narnolia Financial Advisors Ltd.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.