Bank stocks continue to fall on RBI rate cut move

Business

oi-Sunil

By Sunil Fernandes

Published: Monday, September 23, 2013, 11:21 [IST]

Banking and financial institution stocks fell for a 2nd day in a row, on RBI move to hike repo rates. Banking stocks had fallen substantially on Friday, after the RBI hiked the repo rate by 0.25%, signalling its intent to battle inflation.

HDFC Bank lost almost 3% in trade, while ICICI Bank fell almost 4%, while IndusInd lost 3% and Yes Bank was down 4.5%.

Joining the private sector banking stocks lower were the PSU banking stocks. Union Bank fell 5.7% in trade, while Oriental Bank and Punjab National Bank were down 5% each, while Bank of Baroda and Bank of India also shed 5% each.

Even housing finance institutions like HDFC, and development institutions like IDFC saw sharp cuts in trade today. Banking stocks are likely to continue to head lower.

The RBI surprised markets negatively on Friday by hiking the repo rate (rates at which banks borrow from the RBI) by 0.25%, which came as a pleasant surprise for the markets. Hike in repo rates normally lead to higher interest rates in the economy, which is not good for economic growth.

However, higher interest rates are needed to tame inflation. This was the first monetary policy under new Governor Raghuram Rajan, which actually stunned the stock markets with banking stocks collapsing.

The RBI also reduced the marginal standing facility (MSF) rate by 75 basis points from 10.25 per cent to 9.5 per cent with immediate effect.

Under the MSF banks were borrowing from the RBI at repo rate, plus 1 per cent, which effectively meant 8.25 per cent. But, with effect from July 17, banks would have been borrowing at 10.25 per cent. This rate now stands reduced by 75 basis points, as against market expectations of 0.25 per cent.

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