Banks Surge as RBI's Rajan Fuels Profit Optimism: Mumbai Mover
Comment of the Day

September 05 2013

Commentary by Eoin Treacy

Banks Surge as RBI's Rajan Fuels Profit Optimism: Mumbai Mover

This article by Anto Antony for Bloomberg may be of interest to subscribers. Here is a section
There's a need to cut the requirement for banks to invest in government securities to ensure lending to productive sectors of the economy, the Reserve Bank of India's Raghuram Rajan said yesterday on his first day as governor. The central bank will also look at ways to improve the recovery mechanism for bad loans, propose a database for large loans across lenders and allow some lenders to open branches without seeking RBI approval, he said.

Rajan “made major announcements relating to banks, with a view to accelerating long-pending reform issues,” JPMorgan Chase & Co. analysts led by Seshadri Sen said in a report yesterday. The steps “will have a major long-term impact on bank profitability and growth,” they wrote.

Rajan's comments on government securities indicate the RBI is recognizing the need to lower the Statutory Liquidity Ratio, which requires lenders to invest as much as 23 percent of deposits in government securities, according to JPMorgan.

Eoin Treacy's view The appointment of a new central bank governor has been one of a large number of reasons for investor anxiety with regard to India. However, Mr. Rajan was one of the more promising candidates and his intimation that some of the pressure which has been brought to bear on the banking sector is to be removed can only be viewed as positive.

David and I both referred to the steep pace with which the Rupee was declining last week as climactic and some evidence of steadying is now evident. Some doubt continues to linger about the effect on the Rupee and foreign investment if the Fed chooses to taper quantitative easing. However the question remains if this is already in the price? At this stage a clear upward dynamic by the US Dollar would be required to question at least some steadying by the Rupee.

The Bombay Banks Index lost more than a third of its value following the failed break to new all-time highs in May and has returned to test the psychological 10,000 level. It bounced emphatically today on the news referred to above and a sustained move below 10,000 would be required to question potential for an additional bounce.

Among the Indian banks listed abroad, Axis Bank is listed on the International Exchange in London and fell from $30 to $10 over the summer. It is currently working on an upside weekly key reversal and a countermanding downward dynamic would be required to check potential for additional upside.

US listed HDFC Bank has also developed a deeply oversold condition and had returned to a previous area of support. It also posted a large upward dynamic today, suggesting a low of at least near-term and potentially medium-term significance.

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