Last week was an action packed one with the new RBI governor Raghu Raman Rajan announcing slew of short term measures to attract capital inflows and long-term measures like new banks and financial inclusion which infused confidence in the markets. Sensex surged by 650 points taking it to 19,270.
RBI’s promise to give banks more powers in handling the NPA menace has given bank chief executives a sense of new hope. Banking index was the top gainer by 10% followed by PSU, Oil & Gas, Capital Goods, Metal, Power and Realty indices adding 3-8%. FIIs turned buyers to the tune of Rs 982 cr for the week Vs net sell of Rs 2,825 cr previous week.
INR appreciated by three rupee. Money market yield (CP/CD) across tenors softened between 100 – 130 bps. The 10 Yr benchmark bond yield came down to 8.39% on 4th September ie 22bps lower than the previous week closing and hardened by the week end, closing at 8.61%.
In order to support banks to pump in more FX deposits, RBI opened a special window to swap the fresh foreign currency non-resident (banks) FCNR(B) dollar funds, mobilized for a minimum tenor of three years at a subsidized fixed rate of 3.5 per cent per annum. The funds mobilized on an incremental basis are exempt from CRR and SLR requirements & would help banks to reduce their cost of funds.
But, there’s a catch. As per the current RBI guidelines, Banks are prohibited from granting fresh loans or renewing existing loans in excess of Rupees one crore (Rs.100 Lacs) against FCNR (B) deposits, which is a dampener for the banks to offer leveraged position through their off shore branches. RBI should address this lacuna which can accelerate dollar flows significantly given the fact that the Interest on FCNR – B deposits are exempt from income and wealth tax. Rupee stability will provide room for the central bank to take monetary measures to spur growth. Equities look attractive with Sensex trading at 1 year forward PE of 14.4x which is below the historical valuations.
The major trigger for the week will be the outcome of US Fed meet scheduled on 18th September followed by the Indian Central Bank’s second quarter review of monetary policy on 20th September.
Liquidity will remain tight this week due to advance tax outflow. With an inverted yield curve, it makes more sense to be overweight at the shorter end of the yield curve; preferably fixed maturity plans (up to 1 year)/Short term funds with an average maturity of around 2 years.