TIME TO BUY NBFCs

The RBI's decision to halt the rate hike in the April MPC meeting is a welcome relief for NBFCs as it will prevent a decline in NIM and simultaneously boost loan growth.

The current state of macro stability is favorable and better than ever before. Inflation seems to have peaked out, and as a result, the interest rate has also peaked out, which was evident in the last policy. If the monsoon is good, it is expected that the rural demand will pick up. The GDP growth may hover around 6.5% to 7 per cent.

IN a surprise move, after hiking repo rate by a cumulative 250 bps over the past year, the apex bank of India, decided to pause the rate hike in its last policy meeting. This has a positive spillover towards all the rate sensitive sectors including financial sector. This is clearly visible from the outperformance of Nifty Financial Services, which is constituted by banks and other financial companies, over Nifty 50. In last one year ending May 05, 2023 it has generated return of almost 17 per cent compared to just 8 per cent by Nifty 50. Even from the time when the rate pause was announced in the month of April, Nifty Fin Services index has outperformed Nifty 50 by 200 basis points.

NBFCs & Interest Rate 

Even within the financial sector it was NBFCs that are likely to disproportionately benefit from the rate pause decision of the Reserve Bank of India. Shares of many companies from this sector are already trading at their 52-week high in last couple of weeks. NBFC have been under pressure in the last few quarters and its strain was felt on the net interest margins due to rising borrowing cost after the Reserve Bank of India move to hike the repo rate to fight against inflation. This had increased the cost of borrowing for NBFC who lack the low cost of deposits such as current account and savings account that a bank enjoys. Hence, they are likely to more benefit from Reserve Bank of India’s rate pause.