A hike won’t stop the coming boom

RBI is expected to come out with its monetary policy by the end of January. The market is expecting a rate hike or CRR hike by the RBI. The market has already discounted these expectations, as the banking shares have been underperforming the market in last 4 weeks. But the concerns of monetary tightening by the market have been overdone in our opinion. Banks are still sitting on huge liquidity and FIIs are pouring in money in the market on every fall. Interest rates are almost 2-3% lower than peak rates, even lower in case of some products. It will take several rate hikes by the RBI over a period of a couple of years, before interest rates become high enough to actually hamper demand in the economy. The fact is that as foreign money continues to come into the economy, the business confidence and consumer confidence starts picking up, economic activity tends to get a boost and companies and individuals alike look to borrow money from domestic banks even at increasing rates due to the positive economic environment. In our view, we are just at the beginning of a sharp increase in loan growth and overall economic activity, which we believe will take the markets and with that banking stocks, to much higher levels in the coming quarters.

By Vaibhav Agrawal, VP Research-Banking, Angel Broking