Capitulation in banking stocks as bond yields rise

Business

oi-Sunil

By Sunil Fernandes

Published: Wednesday, August 28, 2013, 10:31 [IST]

Banking stocks were hit once again in trade today with shares of private sector and public sector banks falling sharply as a falling rupee raised bond yields.

Shares in State Bank of India plunged to a 52-week low of Rs 1478, while ICICI Bank also hit a 52-week low of Rs 766 and Axis Bank plunged to a 52-week low of Rs 803.60. Joining these banks lower were IDBI Bank, Bank of India, Union Bank of India, Dena Bank and Canara Bank to name a few.

A falling rupee has led to bond yields hardening, which has put pressure on bond prices. When bond yields rise, bond prices fall affecting banks. The benchmark 10-year government bond yield had surged to record levels of 9.48 percent a few days ago, is trading at 9 per cent again.

Banking stocks have been falling ever since the RBI announced measures to drain liquidity from the system to help battle the falling rupee.

It maybe recalled that the Marginal Standing Facility (MSF) rate for banks was hiked last month by 300 basis points above the policy repo rate under the Liquidity Adjustment Facility (LAF). Consequently, the MSF rate is now 10.25 per cent. This led to sharp decline in banking stocks, particularly stocks of banks that depend on wholesale funding.

The overall allocation of funds under the LAF was restricted to 1 per cent of the Net Demand and Time Liabilities.

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