By DK Aggarwal
Recent improvement in bank credit growth to about 14.4 per cent, pro-growth stance of the central bank, banking recapitalisation, improvement in liquidity, confidence and risk adverse valuations are some of the factors that collectively acted as a trigger for the surge in the banking index that crossed previous highs.
Actually, because of aggressive recovery drive and write-offs by banks, NPAs in the banking sector are expected to moderate to 1.9-2.4 per cent in 2019-20.
As of now, the two macro indicators are turning favourable, namely current account deficit (CAD) (as per provisional data) and inflation. Going ahead, it is expected that crude oil prices will continue to stabilise, giving much support to the currency and resulting in a further narrowing of CAD.
The economy slowed to a five-quarter low of 6.6 per cent in October-December due to political uncertainty ahead of the general election, weak domestic demand and a global slowdown. Given benign inflation and weak demand, the IIP number and weak manufacturing data indicate that RBI will continue to remain accommodative to address challenges to sustained growth of the Indian economy.
Moreover, liquidity will be a dominant theme in the financial market as almost all the central banks across the globe are maintaining accommodative stance due to sluggish global growth to support their respective economies.
The broad-based rally in the equity markets this time around is looking much stronger led by banking and financial stocks. Recently, banking and financial services indices climbed 10 per cent and 8 per cent, respectively.
Going forward, it is expected that credit growth will continue to remain strong on the back of improving economic parameters. Undoubtedly, the regulatory constraint persists, but the recognition of almost all the stressed assets as well as a steady decline in NPAs would improve capital ratios of banking and financial sectors.
With all these positives arrows in the quiver, it is expected that the next leg in the economy and the rally in the stock market would be led by banking and financials.
Chairman & Managing Director,SMC Investments and Advisors Limited
Source: Economic Times