Repo rate hold by the RBI!

RBI’s holding of the repo rate is no big surprise as it was already reported that a rate cut was ‘highly improbable’ though India's main inflation gauge WPI rose 7.24 percent from a year earlier against the expectations of 7.6 percent. Of course, a rate cut of 8 percent is possible in January and leading international economists forecast a series of rate cuts in 2013 and this will definitely show gains in the BSE Banking Index. Thanks to possible easing of inflation in the next few months!

The RBI kept interest rates on hold though the government put pressure on the central bank to reduce borrowing costs. The bank assured of a rate cut in January and shifted focus towards enhancing a flagging Indian economy. BSE Banking Index at NSE went up with both the sensex and nifty trending at a moderate rate.

One of the reasons for the RBI holding the repo rate was the low GDP growth (below 6 percent) posted for the past three quarters.

Moody’s outlook for the Indian banking system and BSE Banking Index!

Banks’ profits are likely under pressure over the next 12 to 18 months. Yes, the Indian banking system, as projected by the rating agency Moody’s, would remain in the negative owing to a challenging operating environment. The negative atmosphere follows from a blend of weak local currency, high inflation, high interest rates, and of course slow economic growth! It is the slowest growth in a decade that is being witnessed for the fiscal year that ends in March 2013. In the September quarter, the Indian economy grew by 5.3 percent.

Moody's representative pointed that the negativity of the situation of the Indian banking system may further lead to a further worsening in asset quality, fall in profitability, and an increase in provisioning costs. Thanks to the decision by the government of injecting additional capital into the state banks within the next few weeks; but the injection would not exceed the Rs.150 billion mark.

Moody's rating did not show any major impact on the BSE Banking index. Infact, SBI shares were up by 2% in the morning session, trading near INR2239/- The capital infusion news by the Finance Minister has given a spur to the Banking Index. The government is likely to take decision on the capitual infusion this week, however it will be restricted to the 150 billion rupees mark as suggested in the fiscal budget 2013.