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Bank stocks are likely to remain volatile in the coming week with the Reserve Bank of India's monetary policy review on Tuesday providing direction to stocks in the sector. Market is hopeful that the RBI will either cut repo rate on Tuesday or provide more clarity on whether it will definitely cut rates at its Jan 29 policy review. Among those betting on a monetary action, 17 expect the RBI to cut the CRR by 25 bps and leave the policy rate untouched. Only one respondent expects the RBI to cut both the repo rate and the CRR by 50 bps.
Bank stocks will benefit from any cues on policy easing or even a liquidity easing step like a further reduction in cash reserve ratio or statutory liquidity ratio that will indicate the RBI's commitment to an easing in monetary policy.
We continue to expect no change in the repo rate by RBI in the December policy, with the first cut of 25 bps likely to come on the next policy date of 29th Jan. However, given the liquidity condition, the RBI could provide another 25 bps easing in the CRR that would infuse 17,500 crore (175 bln rupees) of liquidity into the banking system.
However, concerns persist on whether the RBI may take further action on the sharp jump in non-performing assets and restructured loans of nearly all banks in the system. At its last policy review on Oct 30, the RBI tightened norms on credit data sharing among banks and also raised the provisioning on standard restructured assets by 75 bps to 2.75%.
The high restructured books of public sector banks which have acted as a dampener on investor sentiments do not seem nearly as threatening once we exclude state electricity board and Air India restructuring which is unlikely to slip into non performing asset category. The revision in rating outlook reflects the increased risk posed by current trends in asset quality, with continuing rise in gross non-performing loans and restructured loans pressuring profits and capital. The banks were particularly challenged by the prevailing operating environment, characterised by high inflation and interest rates.
