Double bonanza for NBFCs; mid & smallcaps to benefit from RBI rate cut: Experts

The Monetary Policy Committee (MPC), on expected lines, changed its stance to 'neutral' from 'calibrated tightening' on February 7 in its sixth bi-monthly monetary policy review meeting but what came as a surprise was the repo rate cut of 25 basis points (bps).

The rate cut by the Reserve Bank of India (RBI) will help banks to address liquidity issues and at the same time, low cost of funds is likely to boost consumption, suggest experts. Fall in the cost of funds will also aid lending, so it is positive for banks as well as NBFCs.

“A rate cut of 25 basis points is an act of fine balance between maintaining real income and boosting economic growth. Benign inflation trajectory and low private capex were key enablers for a rate cut, which is good for mid and small-cap companies,” Dharmesh Kant, Head - Retail Research, IndiaNivesh told Moneycontrol.

The RBI has removed 100 percent risk weights for NBFCs and now their risk weights will be as per their rating, which is a positive development for higher rated NBFCs, suggest experts. The future commentary suggests that more cuts are in the offing that will be taken positively by traders and investors.

RBI said that with a view to facilitating the flow of credit to well-rated NBFCs, it has now been decided that rated exposures of banks to all NBFCs, excluding Core Investment Companies (CICs), would be risk-weighted. This will be as per the ratings assigned by the accredited rating agencies, in a manner similar to that for corporates.

“It's a double bonanza for NBFCs—low cost of funds and a boost in consumption on account of low inflation/high disposal income. What interim Budget 2019 missed for corporates has been largely compensated by the monetary policy committee's change in stance to neutral. It will bring stability to the financial environment,” Kant said.

In the fifth bi-monthly monetary policy resolution in December 2018, CPI inflation for 2018-19 was projected in the range of 2.7-3.2 percent in H2:2018-19 and 3.8-4.2 percent in H1:2019-20, with risks tilted to the upside.

The actual inflation outcome at 2.6 percent in Q3:2018-19 was marginally lower than the projection. There have been downward revisions in inflation projections during the course of the year, which hints at a possibility of further rate cuts in the offing.

“The RBI MPC has delighted market participants by changing stance to neutral and cutting repo rate by 25 bps. Q3FY20 inflation expectation cut to 3.9 percent means some more rate cuts can be expected in the course of the next few meetings,” Dhiraj Relli, MD & CEO, HDFC Securities on RBI Monetary Policy told Moneycontrol.

“Bond yields are likely to fall materially when FPIs revise their short-term view on India (overcoming their fears on the fiscal situation). Equity markets could rise some more, welcoming an attempt to address recent issues in the credit markets, ultimately leading to higher growth,” he said.

Here’s how D-Street reacted post-RBI policy:

Nomura India:

The MPC’s U-turn—from ‘calibrated tightening’ in December (which effectively rules out a rate cut) to a decision to cut rates in February—is a surprise. We expected a rate cut later this year, but the front-ended delivery was a surprise, even relative to our expectations.

On growth, the RBI continues to sound optimistic, in contrast to our assessment that weak global growth, the lagged impact of tighter financial conditions and domestic political uncertainty will trigger a cyclical slowdown.

We are reviewing our call on the policy rate trajectory, but the governor’s statement that “there is room to act” clearly suggests this is not a one and done cut.

VK Vijaykumar, Chief Investment Strategist, Geojit Financial Services:

The unusual turnaround in RBI’s monetary policy from calibrated tightening to rate cut stems from the benign inflation, both current and expected. Since the RBI doesn’t expect the headline inflation to cross 4 percent in CY2019, one can realistically expect one more rate cut this calendar year.

The decision is appropriate in the context of the slowing investment in the economy and since crude can be expected to remain soft in the context of global growth and trade slowdown.

The rate cut is good news from the capital market perspective since it can reinforce the resilience seen in the key benchmark indices.

Sameer Kalra - Equity Research Analyst & Founder Target Investing:

MPC announced cut of 25 bps and changed stance to 'neutral' that addresses two immediate challenges. One is making liquidity available at cheaper costs especially to banks that are focused on higher loan growth via retails loans and asset purchase from NBFCs, though this will not mean cheaper loans to NBFCs as banks are aggressively looking to increase market share.

Because of the 'neutral' stance with lower inflation for H2CY19, we see the scope of a rate cut in April meeting as well. Sectors to benefit are PSU banks and private banks.

Dhananjay Sinha, Head of Research, Economist & Strategist, Emkay Global Financial Services

The RBI announced a change in stance to neutral along with a 25bps cut in repo rate to 6.25 percent. The change in stance is broadly in line with consensus expectations. But, the rate cut was somewhat unexpected. We think the combination of the reflationary budget last week along with monetary easing by the RBI will provide a further boost to consumer demand.

The RBI has also enhanced the limit for collateral-free agri loans to Rs 1.6 lakh from Rs 1 lakh earlier. This measure of RBI is aligned with the big fiscal boost provided to the sector in the recently announced budget. One can expect a stronger push on banks to accommodate larger agri loan waivers and enlargement in credit risk on the agri loan portfolio.

The RBI has also further relaxed the ECB norms for corporates wherein they can borrow up to $750 million through the automatic route, without the restriction of end use to repay existing rupee loans. This is being done to ease the funding pressure on arising from the tightening credit conditions in the domestic market.

Amar Ambani, President & Head of Research, Yes Securities:

With an extremely benign inflation reading and limited risks to the upside and with the rupee having stabilised, it was clear to us that the time was right to provide the much-needed support to economic growth.

This could also be gauged from the RBI policy announcement, where members unanimously voted in favour of changing their policy stance to 'neutral' from 'calibrated tightening'. We welcome this decision and believe that the present situation opens doors for more rate cut action in the year 2019.

Nikhil Kamath, Co-founder & Chief Investment Officer, Zerodha

The RBI s decision to cut repo rates by 25 basis points was largely on expected lines, easing the stance from 'calibrated tightening' to 'neutral' is warranted by an inflation rate, which has largely been contained.

Real rates banks are lending at have gone up in the recent past. This might aid relaxation of rates overall and help end consumers. Industries like real estate and NBFCs, which are facing severe margin pressures, will benefit from this decision.