The RBI’s decision to cut Interest Rate by 25bp to 6.25% bought Big Relief to Banking Sector & Select Few NBFC’s.
This may create upside inflation surprises in the coming quarters but Helpful to Stimulate Banks & NBFC and Broader Indian Economy.
We believe RBI & Populist Interim Union Budget 2019 are simultaneous attempts by the RBI and the government to address the issues of the farm sector, MSME sector, boost disposable income, and maintain low real interest rate (based on core inflation) will help enhance consumption-driven demand in the foreseeable future.
It is geared toward boosting disposable incomes and a huge outlay for the rural areas.
Most importantly, RBI changes its stance to ‘neutral’ from ‘calibrated tightening indicates that Further Rate HIKE will be rare probability & Maintaining Current Interest rate as it is.
The easing of rate has been supported by lower projected headline inflation of 3.2-3.4% in First Half of 2019-20.
The elevated core inflation at 5.7-6% over the past six months has been overlooked by RBI. Because Headline Inflation is 3.2% But Core Inflation is close to 6%.
Core Inflation excludes temporary price volatility such as food items, energy products etc. It reflects the inflation trend in an economy.
RBI based its decision with a focus on low headline inflation even as it underplayed the sticky nature of core inflation alignment of monetary policy with a populist interim budget characterizes a mini-stimulus package.
Housing & MSME Boost: Supported by the RBI’s easing move, the government also aims at helping the housing real-estate and MSME sectors, which have also found significant emphasis in the budget.
Positive For Good Rated NBFC’s: Risk weights for rated exposures to Non-Deposit taking NBFCs/all NBFCs (ex-Core Investment Cos) will now be based on their rating profile instead of being earlier blanketed at 100%. This is a big relief for taking the loan from Bank by Quality NBFC.
Separate guidelines will be issued at the end of Feb 2019. Positive For Banking Sector: The resolution, especially (Corporates) undergoing resolution process under the IBC Code have been allowed to borrow under the ECB window and use the proceeds for the repayment of rupee term loans.
It is positive for banks as it will, to some extent, help accelerate the resolution process and valuations. In addition, measures are also taken to allow ECB for loan repayments by corporates, which is aimed at helping companies facing bankruptcy and liquidation due to tightening credit conditions.
RBI Policy outlook: Overall, We expect RBI to maintain rates at current levels Hence, contrary to the RBI’s expectations, we see core inflation remaining elevated over the medium term (at around 5.5-6%) we believe that the scope for further Rate is Very Less.
We hope this RBI Policy Impact on Indian Economy & Select Few Sectors will help you in Stock Investment.
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