The unprecedented event of Raghuram Rajan’s exit, or Rexit as some call it, as the chief of the Reserve Bank of India (RBI), may sentimentally drag down the equities on Monday’s opening trade. But banking stocks in the private and public sector may not react negatively or may fall by a lesser margin, say analysts.
“If any, this news
is only positive for banks across segments,” says an analyst with a domestic brokerage who did not wish to be quoted. “As Rajan did not indicate a possible extension of term in the recently concluded mid-year policy review, the news
was partly priced in for the banking stocks,” he adds.
Rajan was considered extremely strict on the asset quality of banks. “The pressure on banks to recognise the pain of bad loans irrespective of its impact on their profitability was not taken kindly by most banks,” he emphasises. Experts believe that while the clean-up activity would still be on the course, the fear of its pain extending beyond FY17 may reduce. Analysts now feel that while the new governor may not offer any sweetener to the banks, there could possibly be some relaxation in the manner in which provisioning for bad loans will be made. In April, the RBI pruned the number of companies under Asset Quality Review (AQR) to exclude 20 names from the earlier stated list of 150 companies. Reports suggest that RBI could further trim the norms on bad loan recognition, which analysts say is critical as the government is working with a tight budget of Rs 25,000 crore for recapitalisation of banks.
In fact, a recent note by Elara Capital elucidates that with the creation of Bank Board Bureau the powers of RBI may be restricted. “The formation of BBB will at least till the time banking consolidation is complete, will weaken the position of the Central Banker as a regulator,” the note explains.
However, not everyone believes that banking stocks will see relief. Sanjeev Prasad of Kotak Institutional Securities explains in his note, “Foreign Portfolio Investors liked the combination of the government and the governor and they have been overweight on India despite its rich valuation”. They will now have to grapple with India’s Rexit and a possible ‘Brexit’ in the next few days, he warns.
If these uncertainties tighten their grip on Indian equities, experts feel that bank stocks too may see some correction.