Home / Market / Mark-to-market /  A relief rally in banking stocks after RBI cuts rate

There was a relief rally in banking stocks after the Reserve Bank of India (RBI) sprang a surprise 50 basis points (bps) rate cut. The rate cut, along with other measures such as the proposal to reduce the risk weights on housing loan and cut in banks’ mandatory government security holding requirement, is essentially aimed to boost consumer lending. One basis point is 0.01%.

Immediately after the announcement, some banks such as Andhra Bank and State Bank of India (SBI) cut lending rates by up to 40bps while others such as ICICI Bank Ltd promised to reduce rates.

That in itself is a cause for cheer since the median base lending rate since January has come down only by 30bps compared with a 75bps reduction in the policy rate. That the fall in lending rates comes just ahead of the festival season could also boost demand for personal loans.

However, as analysts and economists have pointed out, the cut in rates may not do much to boost investment spending in an economy with so much slack. Capacity utilization remains below 75%, working capital requirements are lower now as raw material costs have declined sharply and government projects are coming on-stream at a snail’s pace.

So, forget for the moment about any bounce-back in bank credit to companies. Moreover, as the monetary policy report points out, there has been a full transmission of 75bps in commercial paper whose issuances have shot up by 40% this year till September.

Of course, the banks’ reluctance to pass on rate cuts also stems from the fact that about 11% of their loans are stressed. Lower interest rates can ease some pressure on these bad loans; at the least, it will make it easier for firms to service their debt.

With the crash in metal prices and continuing problems in industries such as infrastructure leading to defaults from already restructured loans, it is unlikely that there will be a significant improvement in asset quality in the near term.

Moreover, margins will also likely take a hit by up to 15bps this fiscal year to March as loans get re-priced despite a softening in money market rates bringing down the cost of funds. There will also be some mark-to-market gains with government bond yields coming down. Bond yields and prices move in opposite directions.

In the end, it all boils down to how much credit grows and asset quality improves. For the latter, the coming earnings season will offer a pointer.

The writer does not own shares in the above-mentioned companies.

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