The Reserve Bank of India governor, Y Venugopal Reddy presented the Mid-term Review of Annual Policy for the Year 2007-08 on October 30 and did not create ripples for the investing community at large. First cut, there is not much portfolio shuffling you would require to do as a reaction to the credit policy announcement. Devendra Nevgi, CEO & CIO, Quantum Asset Management Company, says, ?The RBIs focus was clearly on management of global liquidity (capital flows) and containing risks of financial instability that may occur due to adverse developments in global markets. The large capital flows were clearly hindering the monetary policy effectiveness and pushing the money supply beyond RBI?s target (17-17.5%), which in turn was pushing the asset prices (stocks and real estate) higher.?
Those who were expecting announcements that would make the cost of their home loans lower, will be tad disappointed as the governor did not tinker with the provisions. In earlier announcements, the governor had announced a higher risk weightage to be attached to home loans. This immediately saw banks announcing a rate hike. Later, the weightages were relaxed for loans below Rs 20 lakh. In this policy announcement there were hints that the central bank is viewing development in the real estate market closely and will be ready to move in when abnormalities are discovered.
The most significant move in the policy was the announcement that the cash reserve ratio (CRR) that banks have to hold with the RBI was increased by 50 basis points to 7.5% effective fortnight beginning November 10, 2007. The direct impact will be felt by the commercial banks, which stand to face a crunch of around 50 basis points on their margins.
However, from an equity investing perspective, analysts are not much perturbed. Most believe that banking stocks will have to be a significant part of your portfolio, aimed at wealth building. Already, the BSE Bankex, an index that tracks the movement in banking sector stocks, has outperformed the Sensex in the past one year. And banking sector-specific funds have been top amongst fund outperformers. Strong demand for credit means that the banks will keep generating good business, though the concern would be on asset quality.
The overall impact on equities, as an outcome of the credit policy is little, save the fact that there is no let-up in the interest rates. Interest rates have been taking a toll on corporate profitability and have been the highest growing cost centre for corporates.
The biggest impact for the investing community comes from the stance adopted by commercial banks. In a bid to safe guard their profit margins, banks have started to lower deposit rates. A few banks have already announced a reduction in deposits accepted by them.
It would therefore be smart if you could move with speed and lock yourself in some of the rates that are still above 9%, say financial planners. The belief is that if all goes well, and there are no significant shocks, the central bank will start taking a softer stance towards interest rates. And interest rates could start softening by the beginning of the next year. Another interesting perspective is to get a portion of your debt allocation locked into non-convertible debentures and fixed deposits offered by Indian corporates. It would be prudent to choose only well-rated companies and those with a sound track record. There are options where you could actually get 11% plus rates from top-rated companies.
And here, market insiders are whispering in hushed voices that many companies are making moves to reduce rates here as well. Some companies have issued unofficial notices to stop accepting deposits, till a new rate is worked out. The opportunity of getting locked into a higher rate might just be slipping away.