Mr. Dhananjay Sinha, Head of Research, Economist & Strategist, Emkay Global Financial Services.
- RBI maintains key policy rates: Repo rate at 6%; Reverse repo at 5.75% and MSF at 6.25%;
- SLR has been reduced to 19.5% from 20% earlier.
- Growth outlook revised downward to 6.7% from 7.3% for FY18E
- Inflation projection range moved up from 4-4.5% to 4.2-4.6% H2FY18 (first half average of ~2.5%)
- Policy stance- Neutral
Key takeaways: Amid rising inflation RBI will increasingly sound less neutral
We believe the tone and tenor of the monetary policy is mildly hawkish notwithstanding the scaling down of the growth projection.
The stance of RBI on inflation appears to be somewhat concerning with several indicators pointing towards broad based inflationary pressure, especially from core inflation.
Risks to inflation emanates from a) fiscal expansion, b) farm loan waiver, c) rising commodity prices, d) implementation of 7th pay commission, e) price revisions pending from GST implantation, f) prospects of sharper rise in services sector inflation.
With respect to growth revival, RBI has suggested several government policy measures (eg recap of banks, employment generating schemes, infra spending, capex by PSUs), implying that the onus largely lies on the government instead of monetary policy measures.
As anticipated, RBI has highlighted that rising input cost and weak pricing power among Indian corporate sector exposes them to lower margins and profits growth.
The RBI is concerned with the juxtaposition of slower domestic growth and rising inflation against the backdrop of normalization of global liquidity and policy rates in advanced economies. Cleary, the escalation of global geo-political uncertainties and heightening volatility in financial markets have prompted RBI to take a precautionary stance.
We continue to maintain our view of hardening inflation outlook (4.2-4.5% with an upside bias), RBI refraining from further rate cuts, the tone of RBI progressively getting less neutral, 10 year Gsec Yield heading towards 7% and INR remaining under pressure due to emergence of twin-deficit problem and receding excess global liquidity.
Impact of banks and NBFC sectors: Narrowing margins
Hardening of yields and normalization of liquidity to impact NBFC/HFCs; We prefer players with strong balacesheet
- With upward revision in inflation target and gradually tightening liquidity situation we believe the rates in the wholesale markets are likely to harden.
- This might have a negative impact for margins of asset financing NBFCs and even more for the finely priced housing finance segment (where competition is even intense). Till now these companies enjoyed the benefits of falling wholesale borrowing rates and easy liquidity situation. Reversal of the same and inability to pass on the increase due to tight competition is likely to have negative impact on NIMs of these companies.
- We continue to prefer companies with stronger balance sheets and niche plays within the NBFC space – Baja Finance, Cholamandalam Finance and Magma Fincorp are our preferred picks.
RBI getting stringent on the need MCLR transmission to compress margins for banks
- RBI Dy. Governor Viral Acharya observed MCLR is not effectively transmitting earlier policy rate easing. The banks’ practice of yearly resets is acting as a hindrance in transmission and it is desirable to have shorter resets, preferably quarterly. He again reiterated the need to move loan pricing to a market linked benchmark.
- Though RBI is yet to come up with a formal guideline on improving MCLR transmission, banks are unlikely to miss the message RBI is trying to send. Earlier, banks tried to protect their NIMs by prolonging the resets under MCLR.
- However, with the latest RBI nudge to move to quarterly resets, the banks’ NIMs face imminent pressure. In our view, this move will be negative for banks with significant floating rate portfolios, particularly PSBs, which also run ALM mismatches. Private retail banks (HDFCB, IIB) that run fixed rate term loan portfolios shall stay relatively insulated.