New Delhi [India], February 6 : Upcoming monetary policy announcement by the Reserve Bank of India (RBI) is expected to provide clarity on crucial aspects that will shape the financial services sector, according to a report by HSBC.
The report stated that a more accommodative stance from the RBI would be particularly beneficial for Non-Banking Financial Companies (NBFCs) and banks, influencing their growth and profitability.
It said "RBI will be more accommodative going forward which would be positive for all NBFCs, especially the larger, better-diversified and highly rated NBFCs.
One of the most significant expectations from the policy is continued liquidity support. The RBI's recent liquidity infusion through Open Market Operations (OMO) was a key step in addressing the tight liquidity conditions. This has raised hopes that the central bank will maintain an accommodative approach, which would be especially positive for well-diversified and highly rated NBFCs. Enhanced liquidity would allow these financial institutions to sustain credit growth and manage funding costs efficiently.
For banks, the impact of policy measures will depend on their asset composition and earnings structure. In previous analyses, it was observed that banks with a higher Return on Assets (ROA) may experience lower earnings volatility despite having a greater proportion of loans linked to the External Benchmark Lending Rate (EBLR).
Additionally, banks with a significant portion of fixed-rate loans are likely to benefit more at the margin. However, the expected benefits for Public Sector Banks (PSBs) may be limited.
Since PSBs already have sufficient liquidity and relatively lower ROA, a repo rate cut may not provide them with a major advantage unless it is accompanied by a reduction in the Cash Reserve Ratio (CRR) or the Statutory Liquidity Ratio (SLR).
The best possible outcome for banks would be a combination of OMO and regulatory relaxations without a repo rate cut. This would help in maintaining net interest margins (NIMs) while also reducing funding costs.
HSBC said "No repo cut, but OMO + regulatory relaxations to be the best outcome for banks: This combination of measures would be a very positive outcome for private and PSU Banks"
In the medium term, such measures could support better deposit growth, ensuring a stable financial environment. Furthermore, any regulatory relaxation could significantly impact the growth and provisioning outlook for banks facing constraints.
Overall, the RBI's policy stance will be crucial in determining the trajectory of the financial sector. While a repo rate cut may not be the preferred solution, liquidity support through OMO and regulatory flexibility could provide the necessary momentum for banks and NBFCs to navigate the current economic landscape effectively.