Outlook worsening for bank stocks as Street awaits RBI policy rate decision

(Representative image)

The Reserve Bank of India is set to announce its monetary policy meeting outcome on April 6. Projections are divided, with some batting for a pause while others expecting one last rate hike. No matter what the decision is, it will probably not be unanimous, believe analysts.

The central bank has raised interest rates sharply by 250 basis points in the last several months as it has tried to battle inflation. This has meant that EMIs for loans have gone higher. However, loan growth has not slowed.

“Given the recent increase in interest rates and loans having different repricing points, it is fair to assume that we still have some more room for interest rates to rise,” said M B Mahesh, an analyst at Kotak Institutional Equities. “The pace of transmission is probably the fastest that we are seeing currently and we don’t have precedence to compare this change with historical data to suggest consumer behaviour. Historically, the relationship of interest rates with loan growth has been weak.”

Data shows credit growth was strong in March, led by retail (20 percent year-on-year), MSME or micro, small and medium enterprise (13 percent) and services (21 percent) sectors, whereas credit to large industry was still sluggish (7 percent growth on-year).

In the wake of the last several policy meetings, bank stocks did react much immediately notwithstanding the nature of the central bank’s decision. However, the general trend has been negative, evident from the 5 percent drop in the Nifty Bank so far since January.

There have been several headwinds for the banking sector in recent months. Mahesh highlights that banks cannot totally ignore the rate decision as it is eventually making some things difficult for them. The market has also been acknowledging this fact.

“We maintain that the tight liquidity conditions leading to banks offering higher deposit rates and sharp repricing of deposits that is yet to be completed would result in NIM (net interest margin) contraction. However, we see limited concerns on asset quality as borrowers appear to be in a comfortable position,” said Mahesh.

Cyril Charly, research analyst at Geojit Financial Services, agrees. “Although margins improved during FY23 with strong loan demand and improved book quality, further upward repricing of deposit rates due to growth imbalance could add pressure on margins,” he said. “With expected moderation in credit growth during FY24 and pressure on margins, we maintain our neutral view on the sector, but with a stock-to-stock approach. A long-term investor can employ an accumulation strategy during the year as the sector is now trading at its long-term averages.”

On April 5 as well, bank stocks were a mixed bag but the Nifty Bank index managed to rise by about half a percent to 40,999.15. Gains were largely led by HDFC Bank, followed by Bandhan Bank and Kotak Mahindra Bank.

“The index’s next hurdle on the upside stands at the 41,500-41,600 zone which can act as a profit-booking zone for the short term,” said Rupak De, senior technical analyst at LKP Securities. “The index, however, surpassing those levels on a closing basis, can extend the rally towards 42,000-42,500 levels. The lower-end support is visible at the 40,600-40,500 zone, which will cushion the bulls.”

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