PSU banking stocks drop after RBI maintains status quo

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PSU banking stocks drop after RBI maintains status quo
Indian Overseas Bank: Quotes, News
BSE 25.55BSE Quote0.25 (0.98%)
NSE 25.60NSE Quote0.25 (0.98%)
Allahabad Bank: Quotes, News
BSE 77.60BSE Quote0.15 (0.19%)
NSE 77.60NSE Quote0.2 (0.26%)
Shares of public sector banking stocks fell after the RBI maintained a hold on repo rates and the cash reserve ratio.

PSU banking stocks that dropped after the policy declaration included Oriental bank, State Bank of India, Indian Overseas Bank, IDBI bank, Allahabad Bank, Punjab National Bank, Syndicate Bank, Union Bank of India and Bank of Baroda.

A cut in the CRR in particular would have helped PSU banks which are saddled with bad debts help to improve their margins.

The Reserve Bank of India held repo rates (interest rates) steady, while not obliging on a CRR rate as well, thus disappointing industry and investors. Industry has been hankering for lower repo rates, following a lower than expected WPI inflation number, but, the RBI decided to wait for a more consistent trend.

The RBI has maintained a dovish stand for future hopes of a rate cut. "Headline inflation has been below the Reserve Bank's projected levels over the past two months. The decline in core inflation has also been comforting. These emerging patterns reinforce the likelihood of steady moderation in inflation going into 2013-14, though inflation may edge higher over the next two months. In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards," it has said in a release.

India's central bank is often bogged down by high inflation rates in the economy. If it cuts rates, it could spur growth, but, also push inflation higher. In India the WPI inflation for November came in at a staggering 7.45%. This is certainly high and not in the comfort zone of the RBI. In fact, India's central bank governor, D Subbarao has made it abundantly clear that he wishes to tame inflation, while growth would remain secondary. If one goes by the consumer price index, it is at 9.9% for November, which is almost into double digits.

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