RBI’S CREDIT POLICY – 7th April 2015…

·         Repo Rate – The repo rate under the liquidity adjustment facility (LAF) has been retained unchanged at 7.5%.

·         Reverse repo rate & MSF – Consequently, the reverse repo rate under the LAF remains unchanged at 6.5% with marginal standing facility (MSF) rate and the Bank Rate at 8.5%.

·         Cash Reserve Ratio – The CRR of scheduled banks has been retained unchanged at 4.0% of their net demand and time liabilities (NDTL).

·         Statutory Liquidity Ratio – The SLR remains unchanged at 21.5% of their net demand and time liabilities (NDTL).

Key policy rates unchanged as expected- RBI focuses on monetary policy transmission. Negative for banks in short term but corrections to be utilized to accumulate private banking stocks

 

A.      Rates unchanged while RBI Focuses on monetary policy transmission- RBI kept the key policy rate including repo rate, CRR and SLR unchanged in line with general consensus. However, the banking stocks had built in some expectation of CRR cut which did not materialize. Also, the RBI tone in this monetary policy was mainly directed towards passing on the benefit of earlier repo rate cuts into lower base rate. The policy stated that RBI will encourage banks to move in a time-bound manner to marginal-cost-of-funds based determination of their Base Rate. Base Rates based on marginal cost of funds should be more sensitive to changes in the policy rates. This is negative for banks in short term as its base rate is cut faster while it is positive for corporate sector and retail customers; as they benefit from lower base rate.

B.      Guidance on future rate cuts- As far as the outlook on RBI policy rates is concerned, the Governor emphasized on couple of points including i) future data that will provide clarity on CPI and ii) transmission of earlier rate cuts into lower lending rates. The Governor soothed the markets by indicating that India is better buffered this time against volatility on account of US Fed rate hike. Consequently, it not necessary that India’s interest rate cycle may follow US interest rate trajectory. This provides us comfort that downward interest rate trajectory for India shall continue from medium term perspective, thereby keeping cost of funds for banks under check.

C.      Further norms on the developmental and regulatory policies announced in recent policy statements- These include i) cross-holding amongst banks has been allowed with respect to long term bonds, (which are exempted from regulatory pre-emptions) for lending to infrastructure and affordable housing ii) to issue guidelines related to compensation of the non-executive directors iii) For MFI sector- the limit relating to  total indebtedness of the borrower, eligible rural and semiurban household annual incomes and loan amounts to be disbursed in the first cycle and in subsequent cycles has been revised upwards. For instance, Total indebtedness of a borrower (excluding educational/ medical expenses) not to exceed Rs 1,00,000 which has been raised from the current limit of Rs 50,000. This is positive for SKS Micro Finance.

Our take- In this policy, RBI has mainly focused on transmission of earlier rate cuts into lower lending rate as it encourages banks to move to marginal cost of funding to determine base rate. However, the medium term outlook of downward trending interest trajectory continues. The policy was marginally negative for banks in short term as base rate is cut while medium term outlook remains positive as their cost of fund is likely to continue trend south, thereby supporting its NII and PAT growth. Thus, we recommend investors to use the correction (if it comes about) as an opportunity to accumulate good quality private sector banks which are major beneficiaries of lower interest rate. Yes Bank and Indusind Bank are our top picks. In NBFC space, the companies having high dependence on bank borrowing are likely to benefit as the base rate is cut. Our preferred picks are Dewan Housing, Bajaj Finance and M&M Finance