The Bank Nifty was trading 1.28 per cent lower. Private sector banking names like HDFC Bank, Indus Indus Ind Bank and Axis Bank lost ground. Yes Bank was the worst hit among the private sector names dropping another 3.47 per cent in trade today.
PSU banking stocks were also not spared with Union Bank dropping 3.47 per cent. Financial institutions saw some recovery in their stocks prices with HDFC and IDFC both gaining in trade.
While economists and analysts were focusing on what the RBI would do in its forthcoming Monetary Policy on July 30, the Indian central bank stunned markets by hiking the marginal standing facility for banks (MSF) to 10.25%, indirectly pushing interest rates higher.
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 now have to borrow at 10.25 per cent, which is a good 2 per cent over and above the existing rates.
This is likely to dent margins for some of the banking industry, particularly private sector banking names. Clearly, as banks have to borrow at higher rates from the central bank the interest rates seem headed higher, as cost of funds for banks increase. It's possible that we might see banks hiking their deposit rates and lending rates in the next few weeks.