Revised Stance at Upcoming MPC Meeting? What’s Up?

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In today’s issue of the Morning Toast, we discuss:

MPC will declare its revised stance on key items on Friday.
Retail credit growth shows early signs of pick-up.
As always, an education concept to keep you chugging along.

Coal India: 192.85 | -5.10 (-2.85%)

The script shed 3% on October 6. The company had accorded its in-principle approval to pre-feasibility report for setting up of integrated greenfield aluminum project in Odisha

Tata Motors: 336.05 | -8.90 (-2.58%)

The stock price slipped over 2% after the company’s JLR UK sales declined 53.4% to 7,196 units in September against 15,450 vehicles in the year-ago period

Markets await RBI’s revised stance at the upcoming MPC meeting; What’s up and what do you need to know?🧐

The Monetary Policy Committee will declare its revised stance on key items on Friday, October 8
Bloomberg estimates indicate a lack of consensus with respect to any potential changes to the reverse repo rate; alternatively there might be a signal hinting towards the same to occur in the near future (giving the market enough room to prepare for the likelihood)
At the same time, the G-SAP may become more shallow in the near future (through increased sale of bonds), with the foundation being set at this meet

What are these terms again? 🤔

Reverse repo rate is the rate of interest that the RBI offers to other banks when they deposit funds with it. Naturally, an increase will incentivize banks to deposit more and reduce liquidity in the economy.
Government Securities Acquisition Programme (G-SAP) is how the RBI buys or sells securities with the other banks. It is another liquidity expansion/contraction measure

What’s the backstory?📗

Post Covid, the RBI felt the need to infuse more liquidity in the economy to simulate demand and ensure fast recovery.
But the other end of the sword of high infusion of capital is high inflation.
To control the same, the MPC now needs to roll back the liquidity infused since most of its recovery targets are being met

Okay so what actions are we looking at? 🙄

No direct tightening rules like CRR hikes, MSS or FX swaps are likely to be implemented.
Rather liquidity redistribution could be done via the FX forwards route or higher VRR tenor. (VRR enables FPIs to invest in debt markets)
It is also likely to lower inflation forecast by 30-40bps (while stating caution on upside risks), with the previous reading indicating an ease in supply side bottlenecks ensuring a drop in core & CPI inflation numbers
The MPC will likely signal further confidence about the economic recovery and its growth forecast, even as the committee may caution against continued economic losses due to higher commodity / oil prices and the risk of a possible third wave

What exactly are the odds?

RBI has a war chest for forex reserves ready to tackle any instability in the currency.
However, FPIs may be looking for an increased return to balance this trade risk and may not find India as attractive anymore; and taking this into consideration with Fed related actions may stifle FPI presence in emerging market economies (reducing liquidity in the process)
A piece of potentially good news could be India’s inclusion in the global bond indices thus stimulating debt flows (and we’re looking out for the same!)

We covered the last MPC & what the expectations are from this meet in a previous issue. Check it out here.

Credit growth picks-up on account of business normalisation, with risk of NPAs falling on better collection efficiency: What’s happening in the banking space and what do you need to know? 🤔

Retail credit growth shows early signs of pick up

Provisional credit growth numbers released by some banks (think: HDFCB, IIB, Federal) ahead of Q2 numbers suggest an 8% YoY uptick in growth (for the quarter)
On ground reports (source: Emkay Global) indicate early signs of pick-up in mortgages, and car & card segments, with Personal Loans, MFIs & new Commercial Vehicle bookings struggling
From a wholesale/corporate growth perspective, demand still remains weak with corporate capex yet to fully recover, however working capital demand has allowed HDFCB to gain market share
From a liabilities perspective, deposit growth rates have moderated to 9% YoY (from 10-11% levels), however CASA (Current Account Savings Account) momentum has continued (think: Federal Bank numbers)

Nice! What about cards? How’s HDFCB been post lifting of the ban? ❌

HDFCB is back in the game & how — the market leader is distributing ~400k cards a month, and is likely to cross 500k going forward, in an effort to recover lost market share
To put this into context, 400k cards a month is more than double the pre-ban run-rate for the Bank (huge!!)
The major beneficiary from HDFCBs ban, ICICI has continued to add to its kitty and is showing strong traction, led by ICICI-Amazon co-branded card in run-up to Diwali
Cards in Force (indicate of active cards being used) and spending trends are improving post unlocking, helped by newer trends like BNPL (see image below)

And NPAs? How’s the collection efficiency? What about that side of things?👥

Banks expect fresh retail NPA formation to be on the lower side (comparing on quarterly basis) with institutions having done lumpy recognition in Q1 itself (including in the mortgages space)
There is a stark improvement in the cheque bounce rates – from 31% to 27% in May 21 (still greater than pre-Covid levels, yet inching closer)
From a retail collection perspective, long overdue efficiency at a pan-India level (barring Covid suffering states like Kerala, WB, Assam) has been helped by ease in movement and greater vaccination rates, which are likely to keep stress formation (across products) at a minimum
Corporate resolutions through NCLT have accelerated (post initial hurdles), with three key matters (DHFL, Essar & Bhushan Steel) all being resolved; PSBs like Canara & Union are likely to be biggest beneficiaries

Interesting! Give me some names? Which stocks are most likely to benefit? 👀📌

Among large Private Banks, ICICI Bank is likely to be the greatest beneficiary, with strong growth / asset quality and profitability (healthy cards performance, CASA Ratio continuing to inch-up, strong collection efficiency and minimal NPA formation)
Similarly, HDFCB through a comeback within the Cards space is likely deliver better than expected credit growth, which can lead to better profitability
Among smaller private bank, we recently covered Federal’s Q2 preview, throwing shade on the growling CASA profile, coupled with a shift towards more margin accretive products and a concerted effort to work with fintechs to enhance distribution capabilities (bringing down Cost of Acquisition)

Keep a track? 📌

Share your views by replying to this mail 🤓

What else caught our eye? 👀

Govt may offer some more relief to top telcos

The gov is considering abandoning its INR 40,000 Cr demand in spectrum charges.
Both Vodafone Idea Ltd and Bharti Airtel Ltd could benefit from this move as they are undergoing major financial stress.
This move is believed to be in public interest as it will protect gov revenue and encourage competition to avoid a monopoly. (shoutout to Jio)

Vedanta group has its eyes on Hindustan Copper

The mining giant is set to bid for the government’s stake in the PSU when it enters the privatisation process.
The government will sell 10% of its equity holdings through an Offer for Sale (OFS) at a floor price of INR 116.
Hindustan Copper rose as much as 11.46% to hit an intraday high of ₹ 133.70 once the news hit the market.

HDFC betting big on ETFs

HDFC Mutual Fund has filed for nine ETFs with the SEBI – in an attempt to further its passive investment options.
Low expense ratios and poor performance of actively managed funds (wrt the index) have increased the popularity for ETFs.
Currently it offers four ETFs and the new ones will include a Nifty 100 ETF, Nifty Next 50 ETF, Nifty Private Bank ETF, Nifty 100 Low Volatility 30 ETF among others.