Banking stocks fell in trade today, as bond yields surged after the RBI minutes of meeting of its earlier MPC meet this month indicated a more hawkish tone.
Interestingly, the minutes showed that that Reserve Bank of India Deputy Governor Viral Acharya has tilted in favour of rate hike in June. He will now join RBI Executive Director, Michael Patra, who is also seeking a rate hike.
Bond yields are inversely related to prices. When bond yields rise, bond prices fall. When this happens banks have to make provisions for marked to market losses, which impact financials. Most of the government banks are major investors in government securities, as compared to private sector peers.
Even the private sector banking stocks like HDFC Bank, IndusInd Bank and Karnataka Bank were trading lower, though they were seeing only marginal losses.
If bond yields rise, we may see further drop in stock prices of banks.