PFC: What to expect from RBI policy meeting next week? Mahantesh Sabarad answers

It is the flavour of the season right now. I wanted to ask about the exit poll that is out, the results are out, but the market on Monday will mostly react to the results of the election. So it was expected that the market may see some pressure before the elections, but it has shrugged off those fears and we are seeing record high levels. So what do you think of how the market will react next week considering the election factor?
Well, you see the elections have had their effect already on the markets. In fact, you would have noticed that the FIIs and you yourself kind of mentioned it, that the FIIs selling spree that continued for about three odd months has reversed and become positive. That is a story that can be interpreted with relation to the elections that are happening here that the foreign investment money is still coming in and they are shrugging off the election event.

They are shrugging off the risk related to the election event. Probably they have taken a view about what is likely to be the direction for the markets ahead in terms of a positive direction and that is why we are seeing the Nifty reaching a new record level this week.

Having said that, on the domestic side, we have continuously seen that the confidence by domestic investors in the markets has continued to remain pretty strong. And that has been one of the factors driving the markets steadily up despite the bouts of swelling from FIIs that we have seen.

So I believe that we will continue to see newer highs as far as the markets are concerned and the going seems to be properly laid out.

All the pieces of the jigsaw puzzle are now kind of in place. You have had election results out of the way or elections out of the way. You have the economy growing strong post-COVID. And surprisingly within the economy, the manufacturing sector has rebounded quite sharply.

We now also have an event which was in place already in terms of interest rate stabilising. And the final piece of the jigsaw puzzle is that the geopolitical situation across the globe is somewhat easing off post the war-like situation we had seen around Israel, Hamas.So I think these jigsaw puzzle pieces now being in place, the markets will look for newer territory in terms of highs to be made.

But one of the major upcoming events is the RBI policy. Though the expectations are not much and the Street is expecting that once again there could be a pause coming in from the RBI. But apart from the policy in tits and bits, we did see that RBI coming out with the announcements for the banking sector which had the major impact, case in point being the risk weight asset adjustment. So what is your take regarding the RBI policy, anything that you are expecting and how could be the likely impact on the market movement?
As far as RBI is concerned, I think the policy stance has been pretty much smooth in terms of the transition that we saw from pre-COVID to the post-COVID level where the interest rates were rapidly adjusted to encounter the rising inflation kind of situation.

Now inflation has not been entirely tamed per se, but one can say that the policy rate action from the RBI is kind of now halted. But the risk related to the banking sector, which is what the RBI is getting increasingly worried about and which is what you alluded to is kind of growing up. But one of the factors that I have been observing when it comes to the banking sector is that there are various pieces of lending, various sectors that they lend to.

And the manufacturing sector was plagued with a kind of low capex, low output kind of situation that has now gone away. And therefore, the corporate side of the banking piece is growing beautifully well. It is on the consumer side of the banking which is what the RBI is getting worried about and that is what we saw in terms of the risk weight stance that the RBI dictated related to that.

But even there, what can be clearly seen is that the lower end of the consumer lending is what is getting a bit more riskier and that is what the RBI has recognised.

And therefore, that particular piece of RBI’s policy stance may take a while to get unwound. So I am not saying that the RBI will change its stance related to the risk in the market, but they have definitely changed their stance related to the policy rates. And we will see inflation increasingly getting tamed soon.

In the power sector, we saw that the PSU power stocks are buzzing. What do you think about REC as well as PFC? They are at an all-time high and if I look at the one year chart also, it is up more than 200% and the valuation picture is quite high. So are the valuations expected to sustain? And what do you think about the overall power sector as a whole?
When you talk about the PSU power names that you just named, they are into actually financing business related to the power sector and not necessarily per se power stock. But what has happened in the power sector as a whole is that unlike in the past, we have seen a lot of power plants are now getting out of the NPA kind of situation that existed before. So most of the bad loan situation within the power sector is now going away.

And therefore, the sector has become much more stable. We have renewed investments coming in the power sector particularly on the renewable side, not necessarily on the thermal side. That is providing a bit of growth to these financing companies.

So there is credit growth. There is less of an NPA situation kind of worry for them and that is where valuations have expanded but if a stock is rising 200% in a year, that takes it into actually an unsustainable kind of zone, irrespective of where you start off from in terms of valuation.

So I suspect that these stocks will soon correct as well as the other power stocks are concerned, which are actually into power generation and power distribution, the distribution piece is actually doing better relative to the generation piece right now.

And like I said, that there is kind of a stable outlook as far as powers are concerned. They are finally utilities. Power will continue to get consumed. They will continue to earn revenues at a steady pace and we do not see much growth in terms of overall revenue for them because the power rates hike situation has not yet come into the picture. If that happens, probably the sector will get a leg up.