Jefferies On Financials: Jefferies prefers banks over non-banking financial companies (NBFCs) in a rising interest rate environment, following the Reserve Bank of India's (RBI) decision to raise the benchmark repo rate by 25 basis points (bps) and shift its monetary policy stance to ‘calibrated tightening'.
In a note on financials, the Jefferies analysts Prakhar Sharma and Vinayak Agarwal said the RBI's decision to tighten daily cash reserve ratio (CRR) requirements could have a marginal impact on banks' net interest margins (NIMs), with the resulting increase in funding costs potentially flowing through to NBFCs and corporates.
The RBI raised the daily CRR requirement from 90% to 99%, requiring banks to maintain the prescribed 3% of net demand and time liabilities (NDTL).
Jefferies estimates that, at 100% CRR compliance, banks would hold Rs 8 trillion in CRR balances. A 5-10% increase in these balances could withdraw Rs 400-800 billion of liquidity from the system and raise banks' cost of funds by 1-2 bps.
“It's a small dilution of NIMs and banks may be able to pass to borrowers,” the analysts said.
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RBI's Hawkish Shift Raises Funding Cost Concerns
The RBI's 25-bps repo rate hike took the policy rate to 5.5%, while the standing deposit facility rate stood at 5.25%. The marginal standing facility rate and the Bank Rate were raised to 5.75%.
The Monetary Policy Committee also shifted its stance to ‘calibrated tightening', signalling a greater focus on inflation risks.
The decision came amid persistent price pressures and elevated global crude oil prices linked to renewed tensions in West Asia.
The RBI projected retail inflation at 5.2% for the current financial year, while raising its real GDP growth forecast for FY27 to 7.1%.
For financials, the CRR tightening adds another variable to funding costs and liquidity conditions.
While Jefferies expects the impact on banks' NIMs to remain limited, the brokerage believes banks are better positioned than NBFCs in a rising rate environment.
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