Jefferies India stock recommendations | Stocks to buy today: After the announcement of a 25 bps Repo Rate hike by the Reserve Bank of India (RBI) post-three-day Monetary Policy Committee (MPC) meeting on Wednesday morning, the Jefferies India has gone highly bullish on the Indian banks. The global investment bank believes the RBI's Repo Rate hike may serve as a catalyst for Indian banks. Jefferies India believes RBI's 25 bps rate hike to 5.5% was on expected lines, but the change in policy stance to calibrated tightening lifts consensus rate-hike expectations to 75-100 bps (from 50 bps). It now prefers banking stocks over NBFCs.
Decoding the RBI's MPC meeting outcome, the Jefferies India report said, “RBI's rate hike of 25 bps to 5.5% was on expected lines, but a change in policy stance to calibrated tightening lifts consensus rate hike expectations to 75-100 bps (from 50 bps). This can be a positive catalyst for the earnings of larger private banks, PSU banks and HFCs, whereas a slight risk for smaller private banks, NBFCs and LIs. This may also help Indian banks' performance relative to global financials.”
Explaining the impact of the change in stance at the RBI MPC meeting, the global investment bank said the central bank announced a 25 bps hike in the repo rate to 5.5%. More importantly, it also changed the stance from 'Neutral' to 'Calibrated Tightening' due to higher-than-expected inflation. A change in stance implies there won't be scope for rate cuts, and we may see tighter liquidity conditions through interventions, leading market rates to rise more than the RBI rate. This could lead to RBI rate hikes in the 75-100 bps range, instead of the consensus of 50 bps.
The Jefferies India report believes Indian banks, especially large private banks, have a higher share of policy-rate-linked loans that reprice over 1-3 months. Banks with a higher share of EBLR loans and reasonable domestic LDR could see some positive earnings over the next 3-6 months.
“If we assume a 75 bps hike in rates seeping into yields based on the share of EBLR and banks retain 15% of the same, it can lead to an earnings upgrade for banks or offset pressure on earnings in case of PSUs' wage hike / ECL transition,” the report said.