The banking stocks have seen a sharp cut in trade today. Axis Bank, Kotak Mahindra Bank, Shriram Finance, Bajaj Finance, and State Bank of India were among the key Nifty losers. The Nifty Bank Index is down over 2.5% intra-day today. The AU Small Finance Bank has plunged over 4%.
The other key banking losers include Axis Bank, down 3.9%, IndusInd Bank, which declined 3.7%, Union Bank of India dropped 3.85%, and other stocks. All the constituents of Nifty Bank were trading in the red. Nifty Bank has dropped 15% in the last one month and 7% in the past six months. Over the last three sessions, the banking stocks have been pulling down the markets since the heaviest constituent’s interim chairman resigned, citing governance issues.
Why are bank stocks falling today?
The Reserve Bank of India has limited the open positions for banks at $100 million in the onshore currency at the end of each trading day.
These new rules hammered down the banking sector stocks. The new rules will be effective on April 10 onwards. The new regulations are likely to compel banks to unwind their large positions and curb one-sided bets against the rupee.
The lender of the last resort announced these rules on Friday, March 27, to stop speculative bets against the currency.
Expert take on RBI action on open positions
Key market veteran and founder of Asksandipsabharwal.com, Sandip Sabharwal, pointed out that, “The entire hypothesis that banks are going to make huge losses in unwinding speculative INR positions as per the recent RBI guidelines is deeply flawed. USDINR today is lower than it was on Thursday. Any unwinding as of now will still be profitable. Overanalysis leads to paralysis is the best that can be said for many armchair economists/strategists.”
He pointed out that “Banks’ core job is not to take open short positions on the Indian Rupee. They should know that RBI knows everything that they are doing.”
IIFL, meanwhile have cut the estimates for FY27 bank earnings. According to their report dated March 29, “We cut FY27-28 est. by 2-5% and are 4% below consensus now. This is led by (1) Lower NIMs due to weak COF transmission – our framework shows only 10-40bps of TD re-pricing remaining, (2) Lower treasury inc. and a potential 40-60bps of networth impact led by spike in bond yields, and (3) Increase in loan growth thanks to rising working capital demand, corporate borrowings moving from capital market to banks and relaxed LDR focus.”
The report added that with “higher sensitivity to deceleration in treasury inc. (21% of PSUs’ PBT) and receding contribution of recoveries from written off loans (13% of PBT), we see earnings momentum for PSUs to moderate (9% Cagr), and trail Pvt banks’ recovery (15% Cagr). We are still constructive on the sector, and find risk-reward very attractive for large Pvt banks, which have de-rated vs. rerating in mid-size Pvt banks and PSUs. Our top picks are ICICI, Axis and RBL.”