Madhuchanda Dey Moneycontrol Research
The change of guard at the Reserve Bank of India (RBI) finds reflection in the latest monetary policy document that has changed the stance of the policy to neutral and has also reduced policy rates by 25 basis points.
Is it time for a party or for caution?
We would go with the latter and the reasons are obvious. While headline inflation has indeed declined with a complete collapse in food prices, core inflation has remained sticky, still hovering around 5.6 percent. While global commodity prices have softened, they may well reverse should there be a thaw in global trade tensions. And there are headwinds galore with an expansionary fiscal policy in the latest Indian budget with significant handouts to small farmers and the middle class.
RBI seems to be banking a lot on lower inflationary expectations of households. According to the RBI, inflationary expectations have softened by 80 basis points for the three-month ahead horizon and by 130 basis points for the twelve-month ahead horizon over the last round. But abating trade worries and expansionary fiscal policy can change inflationary expectations and markets would be mindful of these challenges. The muted reaction of the ten-year bond yield post the policy clearly factors in the caution.
Any cheer for banks?
With no significant tailwind coming from a bond rally, the next question is how relevant this rate action is in impacting the financials of banking companies. In recent times, banks have seen some improvement in interest margin riding on the upward revision in MCLR (marginal cost based lending rate) although the cost of deposits continues to harden with the incremental credit to deposit ratio remaining elevated.
Source: RBI
However, after the IL&FS crisis, banks have seen an improvement in deposits thanks to the subdued sentiment in capital markets and caution about debt mutual funds. The incremental C/D ratio has, therefore, moderated in recent times.
So the rate action doesn’t incrementally change much on the ground. Interest rates on deposits are likely to remain stable and we do not expect a seamless transmission of rates on advances as the competitive intensity remains benign in the credit market with the weakening capital position of banks and weaker NBFCs. In a nutshell, the policy is neutral for banks. We continue to prefer select well-capitalised corporate lenders and retail-focused banks.
The outlook for NBFCs
Turning to the NBFCs, previously all categories of NBFCs were uniformly risk-weighted at 100 percent. With a view to facilitating the flow of credit to well-rated NBFCs, rated exposures of banks to all NBFCs, excluding Core Investment Companies (CICs), would now be risk-weighted as per the ratings assigned by the accredited rating agencies. Hence the larger well-run NBFCs would clearly be in a vantage position. A lower risk weight stands to positively impact their funding cost and should help them in garnering market share at a time when access to funds is severely restricted for the weaker ones.
The growth of larger NBFCs with better underwriting skills should also mean a check on the reckless credit flow to subprime.
We feel larger names like Bajaj Finance, M&M Finance, Shriram Transport and Cholamandalam stand to gain.
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