The September meeting of the Reserve Bank's Monetary Policy Committee is likely to deliver a 45-50 basis points hike in repo rate as inflation has swung back to 7 percent in August, compared to 6.71 percent a month back, believes Raghvendra Nath, the managing director of Ladderup Wealth Management.
Towards the end of this fiscal, loan growth is likely to witness momentum as private capex cycle is expected to pick up. Thus, in terms of lower growth and NPA issue, Ladderup believes the worst for the banking sector is over, shares the veteran finance professional with nearly three decades of experience in the trade in an interview with Moneycontrol.
Going ahead, he says, banks are likely to witness expansion from here on, led by economic revival, rise in capex and retail credit push. Raghvendra Nath, a keen golfer and traveller, believes that in the medium term, India looks attractive from investment point of view. Excerpts from the interaction:
India has relatively lower inflation compared to the US and the UK. Do you think it helps India remain better-placed?
Countries like the US and the UK are more impacted by the Russia-Ukraine war. In 2019, the UK imported around 13 percent of its fuel from Russia. Any disruption to the supply of energy will effect the wholescale prices in the UK. Both, Ukraine and Russia were major agricultural exporters. With the ban on importing oil and other goods from Russia, the prices started skyrocketing.
To shield households and businesses from the economic shock of the pandemic, a massive $5 trillion (£4.1 trillion) spending was approved by the US government, which added fuel to the issues.
India remained neutral in the global uncertainties. Exports of food products like wheat, flour, rice, maida, were prohibited by government to keep the domestic supplies steady and curb price rise. In medium term, therefore, India looks attractive from an investment point of view.
Which sectors are likely to attract more FDI in view of the changing environment in favour of India?
FDI investment in India has jumped 20 times from FY01 to FY22. India is rapidly emerging as a preferred country for foreign investments due to the long-term potential of the country. Thanks to the government, due to improved international relations, attractive business environment and less regulatory restrictions, Foreign direct investment (FDI) has been rising annually. Compared to last year, an inflow of $82 billion, as on May 2022, gross inflow is at $83 billion.
We see huge potential in sectors like IT, finance, FMCG, drugs, telecom, auto etc. Under the FDI policy regime, the Government has implemented several transformative reforms across sectors such as, manufacturing, insurance, defence, financial services, telecom, pharmaceuticals, construction & development, retail trading, e-commerce, civil aviation etc.
Do you expect significant run-up in banking and financial services space? Also, will it be a key driver behind the market rally?
The banking sector has underperformed against the overall market largely due to concerns like subdued bank credit growth and asset quality pressure. In the last few years, bank credit growth was subdued mainly on account of weak demand, balance sheet deleveraging, shift to other funding sources and risk aversion by lenders. Due to the outbreak of Covid-19 there was heightened uncertainty on growth and asset quality which again led to underperformance.
Asset quality of scheduled commercial banks have improved after a long period of stress, in the last three years.
This is majorly driven by write-offs, lower fresh slippages, resolution, recapitalisation and sale of doubtful/loss assets to asset reconstruction companies (ARCs) by taking haircuts. In the last six years, asset quality of banks seems to have bottomed out as gross non-performing assets ratio of all scheduled commercial banks moderated to their lowest level.
In anticipation of rising stress after the end of various regulatory dispensations, most banks had frontloaded provisions in the last few years. Since August 2021, bank credit growth started picking up gradually as economic activities gathered momentum after Covid which was led by retail and MSME segment.
Towards the end of this fiscal, loan growth is likely to witness momentum as private capex cycle is expected to pick up. Thus, in terms of lower growth and NPA issue, we believe the worst for the banking sector is over. Going ahead, it is likely to witness expansion from here on led by economic revival, rise in capex, retail credit push.
Will the Reserve Bank of India announce its last repo rate hike in September policy meeting before taking pause?
We expect that there is high chance of repo rate hike by 45-50 bps in September 30 RBI meet as India's inflation measured through the consumer price index (CPI) rose to 7 percent in August, compared to 6.71 percent seen in July. Food inflation accounts nearly half of CPI and its very likely to remain elevated in September as well, thereby strengthening the case for continued monetary tightening.
We expect that the RBI will be more pressured to control raging inflation as central bank is mandated by Government to maintain retail inflation at 4 percent with a 2 percent margin on either side for a five-year period ending March 2026. As global oil prices moderate, energy inflation will ease substantially thereby giving some relief.
So far in this financial year, the Monetary Policy Committee (MPC), has hiked the key interest rate by 140 bps. But despite of that retail inflation continues to move northward.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.