Banking stocks were in full swing after the RBI’s monetary policy announcement, with the Nifty Bank hitting a fresh all-time high during intraday trade and closing the day at 56,578.40, up 1.47%. The rally was broad-based, with 11 out of 12 stocks in the index ending in the green. IDFC First Bank led the pack with a sharp 7% jump, followed by gains of around 3% each in AU Small Finance Bank and Axis Bank. Other major lenders like Bank of Baroda, Kotak Mahindra Bank, HDFC Bank, PNB, and SBI also rose between 1-3%. Canara Bank was the sole laggard, ending slightly lower.
The list of banking sector stocks saw a big bump-up after the RBI’s higher-than-expected rate cut and liquidity push. The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) cut the Cash Reserve Ratio (CRR) to 3% from 4% and reduced the repo rate by 50 basis points. The Nifty Bank hit a fresh all-time high of 56,695.
The CRR is the percentage of a bank’s total deposits that is required to be kept as cash reserves with the central bank. This prevents banks from lending out all their deposits and helps the central bank control the money supply and inflation.
Banking sector surges ahead
The banking stocks’ basket, Nifty Bank, jumped 1.2% to trade at 56,425.80. The share price of IDFC First Bank surged the most, rising more than 3%. It was followed by the stock prices of Axis Bank, Bank of Baroda, and many others.
The share price of Shriram Finance, Axis Bank, and Bajaj Finance held the top spot in the Nifty 50.
The share price of Shriram Finance rose 6% to an intra-day high of Rs 690.60. The stock price Axis Bank reached up as much as 3.6% to Rs 1,201.20, while the Bajaj twins gained over 5% each in intra-day trade.
Market expert Ajay Bagga highlighted that, “RBI unleashed a landmark policy, more in the nature of the great policies of Bimal Jalan or YV Reddy than today’s data-driven, meeting-to-meeting, midget policies. The 50 basis points rate cut will unleash a massive monetary stimulus in the economy and foster growth and aggregate demand. The CRR cut by 1% is a most unexpected fillip to banks, releasing huge liquidity and shoring up their margins and bottom lines. An A++ policy, timely, bold and far-sighted.”
Why is CRR cut beneficial?
The decreased CRR leaves the banks with more cash to lend out to borrowers, which could be businesses and individuals. In short, it raised lending capacity. Secondly, this will raise net interest margins of the banking and financial companies. When these organisations hold cash to meet CRR norms, they do not earn interest on these funds. A lower CRR means more interesting earning funds, raising Net Interest Income (NII) and overall profitability.
RBI MPC slashes key lending rate by 50 bps
The banker to the government has cut the repo rate by 50 bps, which is significantly higher than estimates, to 5.50% with immediate effect. Consequently, RBI Governor Sanjay Malhotra said, the standing deposit facility (SDF) rate under the liquidity adjustment facility (LAF) shall stand adjusted to 5.25% and the marginal standing facility (MSF) rate and the Bank Rate to 5.75%. Plus, the RBI has now changed its stance to ‘Neutral’ from ‘Accommodative’.
“This big rate cut will impact the margins of the banks and, therefore, bank stocks will be under pressure in the near-term. However, the credit growth that this rate cut will hopefully stimulate will compensate for the dip in margins,” said VK Vijayakumar, Chief Investment Strategist at Geojit Investments.