US Fed meeting underway: The much-awaited event is here. After over four years, the US Federal Reserve is expected to start the rate-reduction cycle on Wednesday, September 18, as inflation has eased considerably in the US while the jobs market is showing signs of cooling off.
Rate cuts are overall positive for markets. A rate cut by the Fed typically leads to increased foreign investment in emerging markets, including India. As US treasury yields decrease, investors may seek higher returns in Indian equities, potentially driving up stock prices. This influx of capital can support banking stocks.
Certain rate-sensitive sections, such as the banking, realty, and automobile sectors, tend to benefit significantly due to the US Fed rate cut. The US Fed rate cut decision is expected to impact Indian banking stocks positively.
Experts observe that after a phase of underperformance, there is a renewed buying interest in private banking stocks even as the public sector banks (PSU) seem to be struggling. ICICI Bank and other prominent private sector banks like Axis Bank, Kotak Mahindra Bank, HDFC Bank, and IndusInd Bank enjoy upbeat investor sentiment.
Experts appear positive about the prospects of banking stocks.
Amit Goel, the co-founder and chief global strategist at Pace 360, believes the Fed rate cut will likely have a positive impact on banking stocks.
"Lower interest rates typically lead to increased borrowing activity, benefiting banks through higher loan demand and associated interest income. Additionally, lower rates can reduce the cost of funds for banks, improving their net interest margins. Moreover, lower interest rates can decrease the risk of loan defaults, enhancing the quality of banks' assets," Goel explained.
Vaibhav Vidwani, a research analyst at Bonanza, said investors should be prepared for potential downturns if the Fed cuts rates by a smaller margin than expected, such as 25 bps.
For banking stocks, Vidwani said the impact of rate cuts can be mixed.
"While lower rates can reduce the cost of funds, banks with a significant portion of their loans linked to external benchmarks may see quicker repricing, which could initially affect margins negatively. However, banks with a healthier asset quality and a better CASA (Current Account Savings Account) ratio might mitigate some risks associated with rate cuts," Vidwani observed.
However, Vidwani believes over the longer term, as the RBI potentially follows the Fed's lead in rate cuts, banks may benefit from an overall lower cost of borrowing. But, the timing and magnitude of these cuts in India may not align directly with those in the US, as the RBI has less leeway given its previous rate increases.
Experts are positive about large private banks with strong market presence and health asset quality at this juncture.
Ajit Mishra, the SVP of research at Religare Broking, pointed out that with the upcoming US Federal Reserve meeting, market sentiment could be influenced by global interest rate trends and monetary policies. In this context, investors should focus on stronger private-sector banks.
"Focusing on stronger private banking stocks like ICICI Bank and IndusInd Bank makes sense, especially on dips. This strategy could help in navigating the near-term uncertainties while capitalizing on the strength of the private banking sector," said Mishra.
Goel of Pace 360 is positive about HDFC Bank, Kotak Mahindra Bank and State Bank of India.
Vidwani of Bonanza prefers Axis Bank over other banking stocks.
"Axis Bank maintains a CD ratio of 90 per cent and a CASA ratio of 43 per cent, which is industry-leading. With the capability to sustain its margin even as interest rates decline, the bank is poised for consistent growth in both advances and deposits. Its technological advancements and extensive reach position it well to meet rising demand. Strong asset quality, adequate capitalisation, and ongoing digital transformation are anticipated to further enhance its performance in the future," said Vidwani.
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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.
