Which Stocks/Sectors To Bet After RBI Announced Incremental CRR For Banks?

In its most recent policy review, the RBI asked for banks to maintain an incremental cash reserve ratio (CRR) of 10% on the growth in their deposits between May 19 and July 28, 2023, while keeping all policy rates the same. This regulation will eat up a large quantity of market liquidity, which indicates that when it immediately affects the broader market, the banking sector is likely to be impacted.

According to the RBI, there has been too much liquidity in the market as a result of the repatriation of the Rs. 2,000 notes, and further, CRR is going to control it. At their meeting on September 8th, this issue will be discussed. Investors should be cautious since market professionals believe that the measure might affect the Banking Sectors Index. Therefore, let's learn from our industry specialists which sectors or stocks to bet on in the midst of the unpredictable market following the RBI's imposition of the CRR.

Aashika Jain, India Editor, Forbes Advisor

Bank stocks have come under pressure after the RBI announcement on the incremental CRR for banks. However, it is to be noted that the RBI's decision is to absorb the excessive liquidity generated by factors such as the return of INR 2,000 notes to the banking system. The RBI categorically said this is purely a temporary measure for managing the liquidity overhang and the central bank expects adequate liquidity in the system to meet the credit needs of the economy even after this temporary impounding.

Keeping this in mind, disregarding the bright prospects of the banking sector and bank stocks including top performers such as IDFC First Bank, Punjab National Bank and IndusInd Bank would be calling them short too soon.

Sectors to watch and bet on must continue to be the banking sector stocks, which would be available at a discount given the temporary fall, and the real estate sector which is set to see stability with the RBI continuing its pause on the repo rate hike for the third time.

Edul Patel- CEO & Co-founder, Mudrex

This incremental Cash Reserve Ratio (ICRR) has been announced by the Reserve Bank of India (RBI) for banks to aid them in preparing better for unforeseen circumstances. The Cash Reserve Ratio (CRR), or the cash parked by banks with the RBI continues to be 4.5% of the bank's deposits. With banks staying away from parking funds with the RBI using the Variable rate reverse repo (VRRR) auctions, The RBI predicts that the banks are at an increased risk of cash running out, making the ICRR a necessity. This could also be because the RBI is predicting a liquidity crunch approaching and does not want banks to risk defaulting or going bankrupt. With the ICRR in place, Banks will reduce their exposure to risky creditors and have liquidity available for the two fortnights. However, This temporary measure will give banks time to adjust their spending and have more liquid cash. Now is a crucial time for NBFCs and mid-market cap banks to see how they fare.

Jignesh Shial, Director - Research; Head of BFSI Sector at InCred Capital

RBI has asked Banks to maintain 10% CRR on incremental NDTL (Net demand and time liabilities) received between 19th May to 28th July on temporary basis to absorb excess liquidity generated in system due to return of Rs2,000 notes

Our calculation suggest Banks increased Rs11tr of NDTL during this period and excess CRR requirement would be of max Rs619bn which is 0.3% of overall Banking NDTL

Thus even if bank are asked to maintain these incremental CRR for whole year then also we don't except any material impact on banks margins and profitability due to the excess CRR

Given 88% of outstanding Rs2,000 notes in circular are already back, thus we don't expect the elevated CRR for incremental NDTL for long

We believe the event will have negligible impact on lenders profitability

We will stick to our preference for Hdfc bank, SBI, MMFS, bajaj finance and spandana sphoorty

Kush Gupta, Director, SKG Assets & Holdings Private Limited

In the bi-monthly policy announcement, RBI has imposed Incremental CRR of 10%. As per RBI, due to return of Rs. 2,000 notes, there has been excess liquidity in the market, incremental CRR will help curb it. This measure will be reviewed in their meeting on 8th September.

The banking sector will face a short term liquidity crunch, since the review is within a month we don't expect major movement in banking stocks. To assume that this would adversely affect the sector is pre-mature. NBFC stocks on the other hand can gain some short term momentum as the incremental CRR is only applicable to scheduled banks.

On a broader level, this could also help in reigning inflation. Approximately Rs. 70,000 Crores of liquidity will be drained out of the system. Banks will still have ample cash to carry out their business.

Milan Sharma, Founder and MD, 35 North Ventures

The incremental CRR hike of 10 percent is a temporary measure by RBI taken to suck out excess liquidity. This excess liquidity in the banks is due to demonetisation of Rs 2000 currency notes, which were in circulation but have now come back to banks. In my opinion, this is a good measure taken by the RBI to achieve its twin objective of stability and control inflation due to surplus liquidity. This will not have any major effect on the functioning of banks and not hamper their existing business. It's purely a short-term measure that will go away once the objectives are achieved. Also, it will help in controlling any undesired spike in retail inflation in the upcoming festival season. Overall, no major effect on banks and the dip in the banking stocks can be used as a buying opportunity.

Utkarsh Sinha managing director Bexley advisors

The RBI is mixing up a complex cocktail that is trying to balance multiple flavors. On the one hand, we have interest rate hikes, designed to suck-off excess liquidity from the market and curb inflation. However, it still confronts excessive inflation, an overhang from the past free-money regime of low rates, and due to fundamental factors affecting the supply chain. Mix this with the ₹2,000 note ban, and the potential for the excess deposits to spur excessive lending, the incremental CRR is a measure designed to balance the flavors once again, and ensure that the present policy direction of keeping excess liquidity away from markets, and keeping inflation low, are met.

Incremental CRR is and should always remain a temporary measure. The challenge occurs in the definition of temporary: CRR is well known and well understood. If Incremental CRR becomes a frequent tool that the central bank deploys to balance its cocktail, it would require a lot of re-learning for bank stock analysts.

However, bank stocks continue to enjoy a buy rating in India, driven by the strong fundamentals of GDP growth, the huge untapped potential for financial market penetration, and strong credit performance improvements.

Santosh Meena, Head of Research at Swastika Investmart Ltd

The RBI governor's decision to maintain unchanged policy rates, as widely anticipated, was overshadowed by a notable upward revision in the inflation forecast. Additionally, the implementation of a 10% incremental Cash Reserve Ratio (CRR) on the growth in Net Demand and Time Liabilities (NDL) between May 19 and July 28 for banks added to the market's unease. Despite these developments, the policy shift did not significantly impact market sentiments.

Presently, the market sentiment appears to be largely unaffected by the policy changes. However, the short-term market structure seems to lean towards a sell-on-rise pattern. This is partly due to the global market's nervousness, exacerbated by the jump in crude oil and other commodity prices, posing notable challenges for the Indian market. Looking ahead, the focal point of market attention is expected to shift toward the impending US inflation figures scheduled for release this evening. There's a discernible risk that the Nifty index might experience a decline toward levels around 19191 and 18888 unless it manages to surpass the 20-Day Moving Average (20-DMA) threshold of 19650.

V.L.A. Ambala (SEBI Registered Research Analyst), Stock Market Today

The Central Bank of India, RBI announced in its recent meeting that all Banks have to maintain a 10% additional CRR from Aug 12 Sat but it is a short-term measure in nature to control surplus liquidity in the banking system. However, it is still unclear who will bear the additional cost. It's an additional burden on Bank Nifty sectors and its impact is very much visible on all primary banks. Banking Sectors Index, Nifty Bank has plunged almost 2% in just two days. In fact, Pvt bank is looking more vulnerable as compared to PSU banks and this pressure may continue for a few days in banking sectors.

However, still there are banks that are outperforming the index namely PNB and SBI. One should watch these stocks closely. Amid the increased selling pressure in the market there are still some sectors that could do really good in the coming quarters and Media, IT, Energy and Metal are on my list.

RELIANCE, HCLTECH, PHOENIXLTD, TITAN, TATA STEEL, IRCTC, SBIN, BHEL, NAVINFLUOR and PNB are some stocks that you can keep on your radar list.

Pratapsingh Nathani, chairman and MD at Beacon Trusteeship

RBI whilst maintaining status quo on all the policy rates has asked banks to maintain an incremental cash reserve ratio (CRR) of 10% on the increase in their deposits between May 19 and July 28, 2023. This is a temporary measure that is intended to absorb excess liquidity in the banking system due to the of the 2000 Rupee notes that have been injected into the banking system.

While it's a temporary measure by the regulator, this move will suck out about INR 1 Trillion (US$ 12 Bn) of liquidity from the banking system and hence there is a fear that this move will start affecting the shorter end of the interest rate curve and harden the overnight money market rates which may temporarily affect some sectors of the economy. As this measure will absorb a good amount of liquidity in the market, its immediate transmission to the general market is likely to affect Banking, Real Estate, Auto & Consumer Durables.

The RBI will review the liquidity situation again on 8th September (ahead of the festive season) and decide the way forward on this new requirement.

Akshat Khetan, Founder, AU Corporate and Legal Advisory Limited (AUCL)

Certainly banking sector stocks are under pressure, nevertheless it is expected to ease soon due to improvised asset quality. It will be the infrastructure and capital goods (the two sectors) ruling the indices in days to come.

Priyanshu Mishra, Managing Director at Blue Bell Capital Pvt. Ltd

The RBI's announcement of an additional Cash Reserve Ratio (CRR) can have a ripple effect across various sectors and stocks in the market. Banking, financial services, and potentially interest-rate-sensitive sectors like real estate, consumer goods, and automobiles are sectors to keep an eye on closely, depending on the broader market sentiment. It's important to do thorough research and analysis when it comes to stocks. Seek out established banks and financial institutions, paying attention to their exposure to changes in CRR and their overall financial health. Conduct thorough research on their exposure to the CRR changes, their asset quality, and management stability. Diversifying your investments across sectors can help mitigate risks. It's essential to consult with a financial advisor and conduct thorough analysis before making any investment decisions because investing involves risks.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.