mumbai, Feb 13, 2024
Roopali Prabhu, CIO and Head of Products and Solutions at Sanctum Wealth, said that it may take a few more months for the RBI to start cutting the rate. She also expects global cues to be a factor in the timing of the rate cut.
In an interview with MintGenie, Prabhu stated that PSU banks have been improving asset quality with their RoAs and RoEs also stable, and hence, they are ripe for re-rating.
How will you rate the FY25 Interim Union Budget?
The last few budgets were development and inclusion-focused, yet considering this was the budget prior to elections there were some apprehensions in markets that the budget could have a populist tilt. The finance minister showed restraint and demonstrated continued commitment to development and inclusion as mentioned earlier. Fiscal deficit control and glide path were the most significant announcements. The revised estimates for FY24 fiscal deficit came in at 5.8% which is 10bps lower than the budgeted estimate of 5.9%. Moreover, the same for FY25 is estimated at 5.1% of GDP (and 4.5% in FY26). Capital outlay for FY25 is budgeted to increase by 16.8% against the downward revised number for FY24 (revised from Rs. 10 Tn to Rs. 9.5 Tn) with the downward revision being a minor disappointment in the budget.
What worked and what didn’t in this budget?
What we deem favorable in the budget was the path of fiscal consolidation to improve India’s sovereign rating while balancing the commitment to maintaining capex. On the flip side, capital outlay for FY25 is budgeted to increase by 16.8% against the downward revised number for FY24 (revised from Rs. 10 Tn to Rs. 9.5 Tn) with the downward revision being a minor disappointment in the budget. Allocation to MNREGA was unchanged, which, in our opinion, was a minor negative given the current pain points of weak rural employment, sentiments, and consumption.
Now that the budget is over, what other trends will the market focus on?
The markets are likely to track the status of rural growth, which has been subdued over the past several quarters. The feeling that we get is that the recovery is not in sight in the near term, and the sentiment has been weakening and will weigh down on the growth of India Inc. Another event that will be closely watched will be the elections. Though the current government is expected to return with a large majority, the markets will be wary of any negative surprises.
Was the RBI policy decision as per your forecast? Any cuts seen anytime soon?
The RBI in its latest monetary policy maintained the repo rate at 6.5% and continued to retain its stance as “the withdrawal of accommodation” which was in line with expectations. While the CPI inflation has moderated in FY24, it is still ruling above the target of 4% with continued uncertainty over food inflation. While the inflation projection for FY24 has been maintained at 5.4%, the CPI projection for 4QFY24 has been reduced to 5.0% from 5.2% in the earlier policy. Inflation for FY25 is expected to average 4.5%.
For inflation to settle closer to the 4% mark durably, it (rate cut) could potentially take a few more months. We also expect global cues to be a factor in the timing of the rate cut.
PSU bank stocks rose post the budget? Is it a good time to buy them?
PSU banks have been improving asset quality and RoAs and RoEs are also stable. They were ripe for re-rating given they were trading at a discount to their private banking peers. While there has been some pressure on NIMs for most of the banks in Q3FY2024 due to the rising cost of funds, we believe that the worst in terms of pressure on the cost of funds is behind us and we expect NIMs for the banking sector to stabilise in FY25. We expect the rerating for the PSU banks will continue given that they still continue to trade at a significant discount to the private sector banks. Should the current dispensation be re-elected, this could potentially give a further boost to the PSU banking stocks.
Post the budget, which sectors would you recommend, and which would you stay away from?
We continue to be positive about the India capex story and are seeing steady interest by the corporates to create capacities to capitalise on emerging growth opportunities. The ability to carry out these investments has also improved, and hence, we are positive on Capital Goods, Cement, and Metals. As mentioned earlier we also remain positive on the PSU banks. Conversely, we are recommending remaining underweight on IT, FMCG, and Consumer Durables given the near-term challenges.
Do you believe bond yields will continue rising?
Bond yields have eased off in the last few months with the benchmark 10-year yields falling by over 30bps since the end of October. Currently, the spread between the repo rate and the 10-year benchmark is at ~60bps which is slightly lower than the historical average. On one hand, RBI has indicated that they will wait for inflation to settle down durably closer to the 4% level before easing, on the other hand, the bond index inclusion-related flows could lead to yields rallying. We think the yields from here have more room to ease than harden.
For more information, please visit www.sanctumwealth.com
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