Banks wary ahead of RBI meet

Tue, 25 Jan 09:30 am

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Asian markets, with the exception of China (down 0.6%) have opened today on a positive note. These are seemingly following cues from the US markets that closed yesterday with 0.9% gain. As for the Indian markets, these have opened in the positive as well. Stocks from the metal and engineering sectors are leading the gainers’ pack currently.

The BSE-Sensex is trading higher by around 80 points (0.4%), while the NSE-Nifty is up about 20 points (0.4%). Mid and small cap stocks are also trading strong, with the BSE Midcap and BSE Small cap indices up by 0.4% apiece. The rupee is trading at 45.51 to the US dollar.

Given the desperation to tame the inflation demon, all eyes are set on the RBI that meets today to decide on its interest rate stance. Economists are expecting the central bank to raise its base interest rate by 0.5%, which will be the fastest one-time rise since the hikes started last year. While many are blaming the current inflation on supply side factors (like weak food grain output), the fear within the RBI is that if it does not do anything now, it might just aggravate the situation. Higher interest rates, on the other hand, will bring its own set of problems. First, it may have a negative impact on India’s economy, which is showing signs of recovery. However, this is a distant possibility given that companies are flush with cash and are themselves not expanding much amidst the fear of flooding the market with over-supply of their produce. On the other hand, however, banks may face bad times in a high interest rate scenario. First, higher rates will lower the prices of the bonds banks hold in their books. And second, banks might see demand for new credit dry up on borrowers' unwillingness to ask for money at higher rates. Other sectors that would be impacted on the demand front owing to higher interest rates are automobiles and real estate. Anyways, banking stocks have opened today on a mixed note. While gains are seen in IDBI Bank and HDFC Bank, SBI and ICICI Bank are trading under pressure.

Paint stocks have also opened on a mixed note today. Berger Paint and Kansai Nerolac are leading the gains while Asian Paints is witnessing some selling. India's largest paint company, Asian Paints announced its 3QFY11 results yesterday. The broader performance has been mixed. The company has posted a 30% YoY growth in net sales during the quarter. This was led by higher demand for its products during the quarter, which was marked by the festival season in India. The company however continues to face some lag in the demand for industrial paints. Anyways, its operating margins came down to 16.4% during 3QFY11, from 19.6% in 3QFY10. The company took the hit of higher raw material costs on the back of rising global crude prices. On the back of this weakness in operating margins, and a 48% YoY rise in depreciation charges, Asian Paints' net profit growth stood at just 11% YoY. As for the nine-month period (9mFY11), while sales grew by 20% YoY, net profits were up only 2% YoY.