RBI MPC: Banks with higher share of floating rates to do well in this higher interest rate regime, says Naveen Kulkarni of Axis Securities

Banks with a higher share of floating rates and a robust CASA-led deposit franchise should be placed well in this increasing interest rate environment as the current credit growth is looking up, Naveen Kulkarni , Chief Investment Officer (CIO) at Axis Securities opines.

On Friday, the Reserve Bank of India (RBI) Governor Shaktikanta Das said that the bank credit growth accelerated to 14 per cent (y-o-y) as on July 15, 2022 from 5.4 per cent in a year ago.

RBI’s decision to hike repo rate by 50 bps was in line with the expectations of the industry, markets and experts. The Monetary Policy Committee (MPC) led by Governor Shaktikanta Das on Friday increased the repo rate to 5.4 per cent from an earlier 4.9 per cent with immediate effect in a unanimous decision.

“With core inflation continuing to hover well above the upper tolerance limit, the RBI increased the repo rate by 50 bps, broadly in line with market expectations. Repo rates reverted to pre-pandemic levels, the highest since August 2019,” the CIO at Axis Securities said.

Banking stocks were trading positively after the bimonthly policy announcements. Nifty Bank Index was up 0.4 per cent ot 164 points around 1:30 pm and was trading at 37919.60. In the 12 share index, 8 stocks were trading in the green while the remaining 4 in the red. ICICI Bank was the top gainer around this time.  

The MPC which began its deliberations for the August policy announcements on August 3 also reviewed the macroeconomic situation and the economic outlook.

While the domestic inflationary pressures seem to be easing out gradually, the geopolitical tensions, volatility in global financial markets, and emerging risk of the global recession continue to remain key risks, Kulkarni said.

Thus, the RBI has retained its inflation estimates for FY23, mildly tweaking Q2 and Q3 estimates, expecting relief only from Q4 onwards. It has also retained its growth estimates at 7.2 per cent for FY23, he further said.

The Central Bank also adjusted the standing deposit facility (SDF) rate to 5.15 per cent and the marginal standing facility (MSF) rate and the Bank Rate to 5.65 per cent.

The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

“The MPC maintained its stance on calibrated withdrawal of accommodation while supporting growth. We have seen system liquidity tighten since RBI started withdrawing excess liquidity, and system credit growth improved to 14 per cent,” Kulkarni said reacting on the RBI monetary policy announcements.

“Incoming data of corporates for Q1 indicate that sales and demand conditions and profitability of manufacturing sector remained buoyant,” he said while delivering.

“Against the prevailing adverse global environment, the MPC noted that domestic economic activity is resilient and progressing broadly along the lines of the June resolution of the MPC. Consumer price inflation has eased from its surge in April but remains uncomfortably high and above the upper threshold of the target. Inflationary pressures are broad-based and core inflation remains at elevated levels. The volatility in global financial markets is impinging upon domestic financial markets, including the currency market, thereby leading to imported inflation,” Governor Das said in his monetary policy statement.

Marzban Irani, CIO (Debt) of LIC Mutual Fund sees the repo rate in the range of 5.5-6 per cent, going ahead. He said that RBI is vigilant on the liquidity front. On rupee, the CIO said that depreciation was primarily due to dollar movement and nothing wrong with India’s fundamentals.

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