Banking stocks collapsed in a heap on Tuesday on apprehensions that the Reserve Bank of India would raise the key policy rate at its forthcoming monetary policy review meeting in early October. A rise in rates typically drives down the value of bonds, resulting in mark-to market losses for banks.
The fears arose because of the continuing depreciation of the rupee which hit a record low on Tuesday. Moreover, bond yields have been moving up after hitting 8% on Monday. The Bank Nifty plummetted by 388.75 points on Tuesday, or 1.40 % to 27,430.75, posting its biggest single-day fall in three months.
Thanks to the fairly steep rise in yields over the past year, banks are already grappling with losses in their bond portfolios. The 10-year paper ended Tuesday’s session at 8.063%, the highest level seen in nearly four years.
The rupee has lost 2% in the last five days with the fall attributed to a number of reasons including the rising crude prices and fall in the emerging markets currency basket. Since mid-August the global prices of crude oil have risen by 12.2% to $79.42 levels per barrel on Tuesday.
All the constituents of the Bank Nifty, barring Axis Bank, declined. IDFC Bank’s stock fell by 6.05% and ended the session at `45. Federal Bank fell by 4.15% and ended Tuesday’s session at `77.40, and Bank of Baroda fell by 4.05% to end the session at `145.55. The share price of Punjab National Bank and State Bank of India declined by more than 3%.
The Bank Nifty has gained 7.4% since the beginning of 2018 against benchmark Nifty’s gain of 9.4%.