Monetary Policy By RBI: Banking Stocks Fall; AU Small, ICICI Bank, Kotak Top Laggards

Banking stocks tumbled after RBI turned hawkish due to rising inflation. But that was not all, the central bank announced a temporary incremental cash reserve ratio (I-CRR) of 10% for scheduled commercial banks which will come into effect from August 12, 2023. The move is intended to absorb surplus liquidity generated by various factors, which also included the return of Rs 2000 banknotes to the system. Bank Nifty plunged by nearly 402 points and BSE Bankex shed at least 437.5 points.

At the time of writing, Bank Nifty traded at 44,640.45, down by 240.25 points or 0.54% after touching an intraday low of 44,479 from the previous close of 44,880.70.

Also, BSE Bankex dived by 281.44 points or 0.56% to trade at 50,098.98, after hitting an intraday low of 49,942.95 compared to the previous session of 50,380.42.

AU Small Finance Bank, ICICI Bank, Kotak Bank, HDFC Bank, Axis Bank, Bank of Baroda, and Canara Bank were in the red. However, stocks like IndusInd Bank, Federal Bank and SBI were among the gainers.

During the monetary policy announcement, RBI governor Shaktikanta declared that it has been decided that with effect from the fortnight beginning August 12, 2023, scheduled banks shall maintain an incremental cash reserve ratio (I-CRR) of 10 per cent on the increase in their net demand and time liabilities (NDTL) between May 19, 2023, and July 28, 2023.

He added, "This measure is intended to absorb the surplus liquidity generated by various factors referred to earlier including the return of ₹2000 notes to the banking system. This is purely a temporary measure for managing the liquidity overhang. Even after this temporary impounding, there will be adequate liquidity in the system to meet the credit needs of the economy."

The CRR will be reviewed on September 8, 2023, or earlier to return the impounded funds to the banking system ahead of the festival season.

Madan Sabnavis, Chief Economist, Bank of Baroda said, "The introduction of an incremental CRR, though temporarily, will impound resources of banks and have an upward impact on market rates. While there will still be surpluses in the market, the concept of impounding of resources will exert upward pressure on sentiment and hence interest rates. We can assume that this will be reversed before the festival/busy season as the RBI could have gone in for OMO to permanently take out liquidity from the system."

Also, Shishir Baijal, Chairman & Managing Director, Knight Frank India said, "Measures to reduce excess liquidity, with temporary tightening through incremental Cash Reserve Ratio at 10%, aligns with price stability goals of the central bank."

RBI decided to keep the policy repo rate unchanged at 6.50% while maintaining its stance of "withdrawal of accommodation" to ensure that inflation progressively aligns with the target while supporting growth.

On the policy, Anshuman Magazine, Chairman & CEO - India, South-East Asia, Middle East & Africa, CBRE said, "We welcome RBI's decision to keep the repo rate unchanged. The move is expected to bring cheer to the housing sector, given the high-interest rate cycle that has been prevalent since last year's consecutive rate hikes. The pause in rate hike will strike the right equilibrium between growth, simultaneously containing inflation and managing external volatilities."

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