India’s Surprise Break On Rate Hike Abates Concerns, Jefferies Says

India’s surprise break on interest rate hike abates concerns and this will be positive for the non-banking financial companies (NBFCs), Jefferies said.

The Monetary Policy Committee (MPC) -- which is responsible for fixing the benchmark interest rate in India -- on 6 April decided unanimously to keep the policy repo rate unchanged at 6.50% after assessing the macroeconomic situation and its outlook, with readiness to act, should the situation so warrant.

The MPC, which is led by the Reserve Bank of India (RBI) Governor Shaktikanta Das, also decided by a majority of five out of six members to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth.

The MPC decided to keep status quo on rates versus expectation of 25 basis points rate hike in a surprising and unanimous move, Jefferies said in an investor note. Cumulatively, the MPC has announced 250 basis points rate hike and the pause might be reflection of stable/easing inflation readings, it added, noting that Consumer Price Index (CPI) at 6.4% was higher than the max target level of 6%.

The brokerage said while rate hike in India has been lower than US Federal Reserve’s 475 basis points, it also reflects relatively lower inflationary pressures.

Tailwinds For NBFCs

Jefferies said the peaking of rate-hike cycle will be positive for NBFCs, which have seen pressure from rising funding costs that dragged net interest margin (NIMs)

The brokerage expects NIMs for its covered auto-NBFCs and affordable housing finance companies (HFCs) to bottom around the second quarter of FY24.

“As margins stabilize, NII (net interest income) growth will start to match loan growth and this can be positive for earnings as well as valuations, especially as NBFCs have generally underperformed market and banks in 2022,” Jefferies said.

The NBFCs underperformed last year versus banks, largely on the back of risk of compression in margins due to high dependence on wholesale funding and rising costs, it added.

“We believe that pressure on margins will peak-out and be adequately factored into the price over next two-to-three quarters, which may set the course for sector to rebound,” Jefferies said.

Credit Growth For Banks To Moderate

The brokerage said banks are already seeing moderation in loan growth, which has moderated from 17% to 15% and should move toward 13%-14% in the coming months, and may see bell-curve on their margins starting to play out from the first quarter/second quarter of FY24.

“This can make potential for earnings surprises a tad weaker,” it added.

Prefers NBFCs Over Banks

Jefferies said the peaking cycle of interest rates will be positive for NBFCs, especially for those with shorter duration of borrowings like microfinance institutions (MFI), gold loans and credit cards.

“NBFCs have generally underperformed market and banks in 2022 and improving topline growth can aid re-rating,” it noted.

The brokerage said its top-picks among NBFCs are Bajaj Finance Ltd. and Cholamandalam Investment and Finance Company Ltd. SBI Cards and Payment Services Ltd. can also benefit from peaking cost pressures, especially given its short duration of funding, it added.

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