Markets Continue Their Uptrend

Wed, 13 Apr 11:30 am

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After opening the day on a positive note, the Indian Markets have added to their early gains. Sectoral indices are trading on a positive note with stocks from the auto and banking sectors leading the gains.

The BSE Sensex is trading up 411 points (up 1.6%) and the NSE Nifty is trading up 121 points (up 1.6%). The BSE Mid Cap and the BSE Small Cap indices are also trading in the green, both up by 1.3%. The rupee is trading at 66.42 to the US$.

Banking stocks are trading on a positive note with ICICI Bank and Kotak Mahindra Bank witnessing maximum buying interest. As per a leading financial daily, Axis Bank has announced a cut in its lending rate by 0.15%. Announcing its maiden MCLR (Marginal Cost Lending Rate) on March 31, the bank had set the overnight rate at 9.10%. However, with the above 0.15% cut, the same will be reduced to 8.95% effective from April 18, 2016.

This will be recorded as the first review introduced by a lender since the introduction of the MCLR with effect from April 1. The MCLR mechanism is introduced to ensure effective transmission of policy rates. The Reserve Bank of India (RBI) has announced that from April 1, 2016, banks must review their lending rates frequently, and reflect changes in their cost of borrowing.

The new lending rates, named Marginal Cost of Funds-based Lending Rate (MCLR), have to be computed based on banks' marginal cost of borrowing, or incremental cost of funds. This is as against the computation based on the average cost of funds that banks have used so far.

What this means is that if a bank's cost of borrowing is 8% now but tomorrow the incremental cost of funds becomes 7.5%, the marginal cost of borrowing for the computation purpose will be 7.5%, rather than the average of the two.

With this regime in place, a fall in deposit rates will be quickly reflected in the lending rates. Also, a rise in deposit rates would mean lending rates going up quickly too. In all, the process will mean quick transmission of policy rates by banks.

Going by the past experience, the direct correlation between RBI cutting the repo rate and banks passing on that cut at the same rate in the form of lower lending rates, is rather weak.

The reason why banks are not willing to cut their lending rates is because it will reduce their income from interest charged. Further, the concern is that public sector banks (PSUs) are staring at a huge amount of corporate bad loans. And in order to handle this, banks are hoping to make a greater profits by cutting their deposit rates, but not passing the cut in lending rates. The MCLR regime should help to address this issue.

Along with Axis Bank, State Bank of India (SBI) and HDFC Bank have their MCLRs at 8.95%.

Stocks in the automobile space are trading on a positive note with Maharashtra Scooters and M&M leading the gains. In another news update it was reported that Mahindra & Mahindra's (M&M) farm equipment sector has launched new range of tractor Yuvo in Madhya Pradesh.

The Yuvo range comes in five models - 265 DI (32HP), 275 DI (35HP), 415 DI (40HP), 475 DI (42 HP), and 575 DI (45 HP). It will be available in 15 states at a starting price of Rs 4.57 lakh for 265 DI (32HP) in Bhopal.

The model is said to offer many new technology features to farmers in the country, who are looking for tractors in 30-45 Horse Power (HP) range. It is designed to deliver superior performance in farming operations in any soil condition and offers versatility to carry out over 30 applications, thus making it ideal for using in any part of the country.

On a separate note, M&M has launched its latest SUV - the NuvoSport earlier this month. The launch has given a further boost to the company's leadership position in the UV segment.

One shall note that the company has completed nine product launches in FY16. The impact of this, along with the above launches, will be reflected in the financials of FY17. We have discussed this in our result analysis report of the company here (subscription required).

Stock of M&M is trading up by around 6.8%. Most of this buying interest came after the Indian Meteorological Department (IMD) yesterday predicted above normal rains in the upcoming monsoon season. This comes as a welcome breather for M&M. The above normal monsoon could improve agricultural incomes which would further improve consumption and boost tractor sales.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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