Morgan Stanley turns 'cautious' on financial services

Morgan Stanley has changed its view on India's financial services stocks to "cautious" from "in-line", citing the Reserve Bank of India's decision to raise two short-term rates in order to tighten liquidity.

"Our in-line view on the sector was premised on stabilising growth and rates," Morgan Stanley said in a report on Tuesday. "Both are at risk now."

Morgan Stanley adds asset quality can continue to surprise negatively given the weakening economy.

The investment bank likes "strong liability franchises" such as HDFC Bank and says state-owned banks will continue to be hurt, while non-banking financial services companies will face higher funding costs. Its top avoids are State Bank of India, Punjab National bank and Axis Bank.

Copyright: Thomson Reuters 2013