Most global brokerage firms see another rate cut by the central bank but at the same time suggested investors remain cautious as transmission of rates will be the key.
The Monetary Policy Committee (MPC) on February 7 changed its stance to neutral from calibrated tightening as expected, but what came as a surprise to the Street was a rate cut of 25 bps which most global brokerages think is just the beginning of easy monetary policy cycle.
The rate cut will stimulate consumption and investment demand to boost economic growth. Most global brokerage firms see another rate cut by the central bank but at the same time suggested investors remain cautious as transmission of rates will be the key.
The rate cut is in the right direction given that the inflation footprint has been benign for some time. The resumption of rate easing cycle will bring down lending rates and will thus help in stimulating demand. But, when will banks take the plunge that remains to be seen.
CLSA in a report said that the rate cut by the MPC is not a good enough kicker, as transmission of rates remains unlikely. Investors should stay cautious.
Reacting to the RBI policy, Morgan Stanley in a note said that reduction in the risk weights on bank lending to certain NBFCs is a key positive. Stocks which are likely to benefit include names like Bajaj Finance, M&M Fin, Shriram Trans & Shriram City.
Reduction in risk weights for NBFCs is expected to free up the equity capital for banks against their exposures to NBFCs, which the banks can use for incremental credit growth or improvement in their capital ratios, suggest experts.
“While this can also result in reduced borrowing rates and incremental credit supply for NBFCs, however, this will depend on banks' willingness to do so. Banks' exposure to NBFCs is estimated at Rs 5.7 lakh crore of which exposure to AFCs, IFCs and IDFs is already risk-weighted based on their ratings,” AM Karthik, Assistant Vice President at ICRA said.
“Assuming 50% of banks' exposure to NBFCs in other category and a 50% reduction in their risk-weights, the capital requirements of banks against this exposure can reduce by ~Rs 12,500 crore, which in turn can be used for incremental lending or improvement their capital ratios. This is equivalent to a 0.125% improvement in capital adequacy ratios for banks,” he said.
The MPC decided to cut repo rate in a 4-2 split and unanimously change its stance from calibrated tightening to neutral. Just four months ago, the RBI had shifted its stance to calibrated tightening.
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