The market has generally responded to the RBI pause on rate hikes positively. The financial sector stocks, especially non-banking lenders, have attracted particular interest from investors and traders. The analysts have also been marginally positive on the sector post the shift in RBI stance.
The RBI, in its latest policy statement, (i) paused the streak of rate hikes; (ii) maintained the “withdrawal of accommodation” monetary policy stance; (iii) upgraded the GDP growth estimates for FY24; and (iv) indicated inflation to stay closer to upper bound of policy tolerance range (4-6%) with upside risks.
For a common small investor like me this translates into the following:
(a) Banks may find it hard to hike lending rates, especially the floating rate loans indirectly pegged to the policy rates. It is pertinent to note that most banks did not pass on the entire repo rate hike of 225bps done in the past one year, to the borrowers.
(b) The liquidity may continue to be tighter, while growth remains buoyant. Strong growth may lead to further widening of the deposit-credit gap, pressuring the deposit rate. The margins of banks may not expand from the current levels. In case of weaker franchises, margins may actually decline in the next 3-4quarters.
(c) Elevated inflation may deny any probability of rate cuts this year – minimizing the probability of any exceptional treasury gains or lower cost of funds.
Thus, re-rating of the financial sector stocks as a whole may be over. After a sharp outperformance of public sector banks, we may see a shift back to quality private sector banks. NBFCs which are able to manage their credit cost better will be in favor as margins remain under pressure. It is also pertinent to note that weather agencies are forecasting a hot summer and less than normal rains. This could impact the repayment capability of rural borrowers to some extent.
In view of this I shall be moderating my strategy stance on financials from overweight to equal weight. I shall in particular reallocate from PSBs to large private sector banks and from MFIs to large diversified NBFCs.
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