Jun 25, 2008|
RBI's move: Playing havoc with banks?
At a time when your monthly food and fuel budget is already pressurising your pockets, the home loan, car loan and personal loan EMIs just got larger. And this swelling budget is not just the problem that individuals are facing. So are the corporates. Challenged by unrelenting inflationary pressures, the Reserve Bank of India (RBI) yesterday adopted a two-pronged approach of hiking the cash reserve ratio (CRR) as well as the repo rate (rate at which the RBI lends to banks) by 0.5% each to suck up an estimated Rs 200 bn from the market.
Also read - What's causing RBI the headache?
Contrary to popular perception, the rate hike is not targeted at just taming the inflation rate but also slowing down growth. As a matter of fact, inflation (as measured by the wholesale price index - WPI) is currently hovering (at 11%) way above the RBI's comfort levels (of 5% to 5.5%). It of course goes without saying that the rate hike will impact the incremental demand for consumer durables and discretionary items (specially funded purchase) that has already been hurt by the rise in prices.
Going back in history
The rise in CRR and repo that will get effected by July 2008 will bring them to a seven and six -year high respectively. While this may sound alarming enough, it needs to be comprehended that the RBI is battling with inflation rate that is also at a 13-year high. The urgency to cool down the same has necessitated the central bank to resort to measures that most of us have erased from our memories. This is particularly so because the rate hikes have been steeper in the past one-year after being benign for most part of this decade.
However, these facts are not reasons enough to panic as the health of Indian economy today is not what it was a decade back. Even if we are to grow at a rate of 7.5% - 8% rate (in real GDP terms) in FY09, rather than sustaining the figure of 9%, we must understand that the growth in already on a high base. Further, the growth is being clocked by an economy that has nearly 60% contribution from industry and service sectors both of which have much lower leverage (debt) than a decade back. As far as the Indian households are concerned, although the leverage ratio in this basket has multiplied nearly 3 times in the past decade, it is still well below not just developed but also most other developing economies.
What do the bankers have to say?
Bankers are of the view that while the liquidity situation will not be very tight even after the rate hikes, primarily because of the slower offtake of funds, they will necessarily have to offer better rates on term deposits and pass on the rate hikes to the advances as well. This may bring down the growth in advances (at 25% YoY in May 2008) and also put net interest margins under pressure.
How will this impact banking companies?
Given that the fortune of banking companies have the highest correlation to the economy as compared to any other sector, the spectre of negative news pertaining to the economy has already taken a toll on banking stocks. As far as the slowdown in credit demand and lower net interest margins are concerned, the same were foreseen given that both the parameters had risen to the historical highs in the past three years. Bankers themselves were skeptical of sustaining the same. Further, the credit to GDP ratio has also risen considerably in the past decade and a slowdown in credit demand is inevitable during an economic downturn. We do not envisage the problems relating to higher delinquency levels to be as severe as that seen in the early part of this decade, as the bankers themselves have become very cautious with regard to their lending parameters this time around and maintain a higher loan to value ratio.
We believe that that the rate hikes will mar the performance of banking companies only in the near term. Banking stocks' attractive valuations at the current levels offer lucrative returns to long term investors.
More Views on News
Aug 10, 2017
IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.
Aug 10, 2017
Asset quality will be the key thing to watch out for going forward.
Jul 31, 2017
Almost 74% of the watchlist as provided by the bank of Rs 226 billion in FY16 has turned into non-performing assets.
Jul 6, 2017
Does the stock score on the value versus price equation?
Jun 27, 2017
Should one subscribe to the IPO of AU Small Finance Bank Ltd?
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407