Note - RBI takes steps to curb rupee volatility (Negative for NBFCs & Banks)

RBI takes steps to curb rupee volatility - Rate cut hopes dashed, steps would translate into higher cost of borrowings, Negative for NBFCs & Banks (especially wholesale banks like Axis Bank, Yes Bank, Canara, OBC, etc and banks with high duration AFS portfolio like PNB, BOI, etc.)

Measures announced

·         The RBI has put a limit on overall overnight borrowing under liquidity adjustment facility (LAF) to Rs 750 bn, which is 1% of NDTL, from July 17. The allocation to individual banks will be made in proportion to their bids.

·         The Marginal Standing Facility (MSF) and the Bank rate have been increased by 200 bps to 10.25% with immediate effect. The MSF is a window that banks resort to when they fall short of the mandatory Statutory Liquidity Ratio (SLR) of 23% to borrow funds from the repo window.

·         Sell government bonds worth Rs 120 bn via open market operations (OMOs) on July 18 to suck out liquidity.

Impact - We believe the capping of LAF at Rs 750 bn in addition to sale of Government bonds via OMO to suck up Rs 120 bn from the system is likely to translate into higher short term rates for borrowers. These measures will force banks to seek funds from markets and offer higher rates to depositors. As a result, interest rates on short-term borrowings, commercial papers & deposit rates may go up in the short term impacting the NBFCs & wholesale funded banks (with lower CASA) the most. If the banks choose to pass on the increased cost by hiking their lending rates, it will raise fresh concerns on growth slowdown & asset quality of the banks. Besides this, spike in Gsec yields, if sustained for a longer time period would result in MTM losses for Banks especially PSU banks who are sitting on excess SLR and have a high duration AFS bond portfolio. The worst affected would be PNB, Canara Bank, BOI, etc.

Overall we believe, NBFCs & Banks (especially wholesale funded like Axis Bank, Yes Bank, Canara Bank, OBC, etc) are likely to remain under pressure in the short term. Comparatively, private banks with strong liability franchise (higher CASA) like HDFC Bank, etc are better placed in the current environment.

FII Flows - Effectively, RBI has raised interest rates without touching the policy rates. The rate cut hopes by the RBI in the near future have been completely dashed. This is likely to re-establish interest rate differential between the US bond yields and Indian bond yields, fueling FII flows in the debt market.

On the flip side, with concerns on growth slowdown likely to get reinforced in the light of further tightening of liquidity & interest rates, the equity markets could see reversals which might pose a bigger challenge for the government with the planned divestment, an urgent need of the hour, to achieve fiscal target.  

Rupee outlook - On the rupee outlook, we believe, while in the short term the Rupee may stabilize on account of various steps taken by the RBI, however, in the long term we need urgent structural changes on the policy front to boost manufacturing sector, simplify exports and make investor friendly policies to attract FDI. Otherwise we will continue to grapple with the problem from time to time.

WHAT EVER YOU EARN FROM MY CALLS PLEASE GIVE 10% PROFIT'S FOOD TO COWS AND DOGS HELP THM GOD WILL HELP YOU-!!!