Some experts see emergence of a 'super credit cycle', leading to higher NPAs and restructuring.
Monday’s surprise reduction in the marginal standing facility (MSF) rate boosted stocks in the morning session on Tuesday, but the market gave up much of the gains to close lower as fears of a likely hike in the key repo rate took hold.
The benchmark Sensex rose over 250 points in morning trade, but gave up two-thirds of the intraday gains to close at 19983.61, up 88.51 points or 0.44% over the previous close. The Nifty ended at 5928.4, up 22.25 points.
The Reserve Bank of India (RBI) meets on October 29 for the second quarter review of the monetary policy. A repo hike is expected to weigh on both loan and economic growth.
Tirthankar Patnaik, strategist and chief economist - institutional research at Religare Capital Markets, expects the pace at which the central bank has responded on the MSF to be repeated in raising the repo by 25-50 bps over the remaining months of this fiscal.
“Rates are likely to rise this year, growth would remain sub-5% (FY14E at 4.5%) this year, fiscal situation remains stretched, and asset quality is unlikely to improve in this scenario. That means the overall macro situation remains shaky, and our portfolio positioning remains cautious,” Patnaik and his team wrote in a note on Tuesday.
The market sentiments were further impacted by the continued US government shutdown and concerns over its debt ceiling. The US risks a default unless lawmakers agree to a hike in the country’s borrowing limit by October 17.
FIIs, which have been waiting on the sidelines over the last few days, remained marginal buyers of equities worth Rs 226 crore on Tuesday, as per provisional data.
The banking stocks, too, gave up most of the gains with the BSE Bankex closing the day up 0.67% after rising as much as 3.72% in intraday trade.
Analysts are also concerned that with rate hikes likely – given the sluggish credit growth and asset quality issues – the banking sector may not see much gains forward.
Rajeev Varma and Veekesh Gandhi, analysts at Bank of America Merrill Lynch, expect total credit growth to fall to 11% as banks are unlikely to cut lending rates. “Total loan growth has risen to 17-18%, but total credit growth (adjusted for commercial paper, or CP, and debentures) is at 15%, as corporates turned to banks for working capital, post the July 15 measures. The lowering of MSF rates will ease the marginal cost of funding for the toprated non-banks and this may also further help corporates to shift back to the CP/ debenture market from loans,” the duo wrote in a note on Tuesday.
The duo also sees the likelihood of a ‘super credit cycle’ emerging, leading to higher non-performing loans and restructuring, especially for government banks, owing to their higher share of loans to corporates and small and medium enterprises.
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