The slow beginnings of a reversal in the rate cycle?

Banks have raised the base rate quite a few times now on the back of the RBI's hawkish stance on the monetary policy. Since Mar 2011, the RBI has hiked the interest rates (repo rates) as many as 13 times. However, in its monetary policy update on Dec 16, 2011, the central bank stated that there could be rate cuts going forward if inflation comes under the levels forecast by it. We believe that the RBI may take some action to revive growth, which has shown signs of a serious slowdown. This is evident from the fact that the Oct 2011 IIP numbers came in at a negative 5% on a YoY basis.

A cutback in the base rate will further help banks' advances to grow. Advances growth has recently shown signs of slowing down. As on Dec 16, 2011, the advances  showed a 17.08% growth on a YoY basis. The RBI has projected that in FY12, advances will grow by 18% due to a rise in interest rates, which increases the cost of borrowing. Another reason is that the uncertain macro environment has put a hold on corporate expansion plans in general.

UBI's decision to cut its base rate was taken in the bank's Asset Liability meeting. Earlier, the bank had reported a bad set of Q2 FY12 numbers. Its Net NPAs increased by 86 bps to 2.04% on a YoY basis. It also witnessed a dip of 14 bps to 3.21% in its Net Interest Margin (NIM) in Q2 FY12.

The table below shows the key financials indicators of the bank:

We, at DSIJ, believe that other banks may cut their base rates sooner or later, which will benefit them. One must closely watch for the 3rd quarter review of the monetary policy, which is scheduled for Jan 24, 2012, and will provide further guidance for our economy. It will be very interesting to see the RBI’s next move. Even though banking stocks are available at cheap valuations, one must wait for the 3rd quarter results of the banks (will be commence in the 2nd week of Jan 2012) and for the monetary policy review before grabbing any scrip in the markets.