RBI's Credit Policy 20th September 2013 - Our take

RBI’S CREDIT POLICY – 20^th September 2013…

·         Repo Rate – The repo rate under the liquidity adjustment facility (LAF) has been increased by 25 bps from 7.25% to 7.5% with immediate effect.

·         Cash Reserve Ratio – The cash reserve ratio (CRR) of scheduled banks has been retained unchanged at 4.0% of their net demand and time liabilities (NDTL). However, reduced the minimum daily maintenance of the cash reserve ratio (CRR) from 99% of the requirement to 95% effective from the fortnight beginning September 21, 2013

·         MSF rate – Reduced the marginal standing facility (MSF) rate by 75 bps from 10.25% to 9.5% with immediate effect

Our Take

The hike in repo rates is likely to impact negatively all levers of growth for banks i.e loan growth, margins & asset quality. The hike in rates just before the PEAK FESTIVE SEASON will act as a dampener for loan growth. It also signals the shift in focus of RBI towards inflation. On the flip side, RBI has reduced MSF rate by 75 bps to 9.5% & the minimum daily maintenance of the CRR from 99% of the requirement to 95% thus beginning the process of cautious unwinding of the exceptional measures. As a result of this, short term rates is likely to come down thus benefiting wholesale funded banks (Yes Bank, Indusind Bank, etc) as their cost of funds declines. While the sector as a whole will see some pressure on NIMs and loan growth, PSU Banks will be worst hit on account of deterioration in the asset quality as industry as a whole remains under stress for an extended period of time.

Thus. we believe as the governor does the fine balancing act between inflation and growth, interest rates (in medium term) will continue to remain high. Focus will shift to December tapering and Q2 results. We expect Q2 results will be weaker as compared to Q1. FIIs have been playing a significant role in the markets. Thus in extreme short term, FII flows will continue to have an influence on the market direction.

Market has self correcting measures. The recent rally has seen a minor correction. Postponement of tapering is a definite reprieve for the markets. It gives RBI room for getting house in shape and focus on improving the macros. Hopefully, it will be using this opportunity to try and stablise INR and build reserves, thereby being better prepared as and when the tapering begins. 

Interest sensitive’s will continue to remain under pressure. Market and data related volatility will remain high. Investors will continue to hide behind defensives. In financials, focus on good quality banks with good franchise and stable asset quality is advised. Earnings growth and visibility is also very important in these uncertain times. HDFC Bank remains our top buy in financials. Among defensives Tech Mahindra, Mindtree, Cipla, Bajaj Corp, Bharti are worth accumulating.

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