HDFC Bank Vs SBI Vs ICICI Bank Vs BoB: Which Large Banks To BUY After RBI Keeps Repo Rate Unchanged?

RBI decided to hold the status quo in the policy repo rate for the sixth time in a row, ending the financial year 2023-24 at a 6.5% interest rate. The move was on the expected lines, however, banking stocks reacted on a volatile note as RBI continues to see liquidity conditions as a concern. After holding over 46,100 levels, Bank Nifty erased its gains and nosedived by as much as 591.3 points to hit an intraday low of 45,227.20. Private bank stocks witnessed huge selling pressure, but the largest PSU lender SBI outperformed the sector.

At the time of writing, Bank Nifty traded at 45,338.30, down by 480.20 points or 1.05%. SBI was the top gainer, surging by 4% after hitting a new 52-week high of Rs 718.90 apiece. Bank of Baroda and Punjab National Bank also climbed by 2.3% and 0.5% respectively. These were the only stocks in green on Bank Nifty.

On the other hand, the top four private banks with massive weightage to the Nifty 50 index were in deep red. Axis Bank was the top loser with a 2.7% drop, followed by ICICI Bank, AU Small Finance Bank and Kotak Bank Mahindra Bank shedding 2-2.5%. HDFC Bank, which has the highest weightage in Nifty, dived by 1.3%. IDFC First Bank was down by 1.02%, while IndusInd Bank slipped by 0.7%.

Bandhan Bank and Federal Bank were marginally down.

The policy repo rate under the liquidity adjustment facility (LAF) is unchanged at 6.50%. While the standing deposit facility (SDF) rate remains unchanged at 6.25%, and the marginal standing facility (MSF) rate and the Bank Rate at 6.75%. Also, five out of six MPC members voted to continue the policy stance. Hence, the MPC decided to remain focused on the withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth

During his speech, RBI governor Shaktikanta Das said, that after remaining in surplus during April-August 2023, system-level liquidity30 turned into deficit from September after a gap of four and half years. Adjusted for government cash balances, potential liquidity in the banking system is still in surplus. During December-January, the Reserve Bank proactively injected liquidity through both the main and the fine-tuning repo operations to ease liquidity tightness in the system.32 With government spending picking up and augmenting system-level liquidity, the Reserve Bank undertook six fine-tuning variable rate reverse repo (VRRR) auctions during February 2-7, 2024 to absorb surplus liquidity.

Further, Das said, that financial market segments have adjusted to the evolving liquidity conditions to varying degrees. While the short-term rates have fluctuated, long-term rates have remained relatively stable, reflecting better anchoring of inflation expectations as indicated in the softening of the term spread in the G-sec market.34 In the credit market, monetary transmission remains incomplete.

RBI Monetary Policy: MPC Holds Status Quo For Entire FY24, Repo Rate At 6.5%

Das reiterated that "RBI's policy stance is in terms of interest rate which is the principal tool of monetary policy in the current framework. He added, Our stance of withdrawal of accommodation should be seen in the context of incomplete transmission and inflation ruling above the target of 4 per cent and our efforts to bring it back to the target on a durable basis. So far as liquidity conditions are concerned, these are being driven by exogenous factors, which are likely to correct in the foreseeable future, aided by our market operations."

Moreover, Das added, "We will deploy an appropriate mix of instruments to modulate both frictional and durable liquidity to ensure that money market interest rates evolve in an orderly manner and financial stability is maintained."

Which Banking Stocks To Prefer After RBI Policy?

Deepak Agrawal, CIO - Debt, Kotak Mahindra AMC:

RBI MPC outcome seems to be "Apt" keeping the policy rate unchanged with a 5:1 vote, given the global and domestic economic outlook. The Governor stated that it is in the last mile of disinflation and that is most challenging. Even though some sections of the market were expecting a stance change to "Neutral", MPC decided to continue with the "withdrawal of accommodation" stance with a 5:1 vote. MPC has pegged FY 25 inflation at 4.5% and FY25 GDP growth higher at 7%. RBI has also maintained that it will remain nimble footed for liquidity management and continue to use VRR and VRRR as per requirement. We continue to expect stance change in Q1FY25 and a 50 bps rate cut in the second half of FY25.

Nikhil Gupta, Chief Economist, MOFSL Group:

Overall, there were no major announcements, hinting at an imminent easing. The RBI has been managing daily liquidity with overnight infusion, as and when required. We don't see easy monetary policy anytime soon, especially with such strong growth.

Sheersham Gupta, Director and Senior Technical Analyst at Rupeezy:

RBI keeps the policy rate unchanged for the sixth straight time. However, what elicited a sharp reaction from the market was the acknowledgement by the RBI regarding the inflation rate being persistently high above the RBI's comfort range of 4 per cent.

Although inflation has significantly moderated since its peak in the summer of 2022, markets would be concerned about the probable withdrawal of accommodation. However, this process may only delay the anticipated rate cuts and not stop it. Markets may see some short-term correction but the larger trend on the upside is still intact.

Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS

The banking sector is currently facing challenges in deposit mobilisation, whereas credit growth continues to remain healthy. Thus, banks will have to garner deposits, especially retail deposits aggressively. However, if banks cannot maintain the pace of deposit growth, it could weigh on margins and/or credit growth. Margins will continue to face headwinds for the next couple of quarters, with CoF moving upward. In our view, RoA for banks have peaked out. We continue to favour larger banks like ICICI Bank, SBI and Bank of Baroda.

Anil Rego, Founder and Fund Manager at Right Horizons:

Markets have touched new highs, especially with earnings for the Q3FY24 coming healthy supporting the trajectory. Investors are bullish as they are favouring rate cuts in 2024 which will unanimously boost the equity markets. The banking sector is the most sensitive to changes in rate cycles and has been a major reason for incremental earnings in FY23 and in H1 of FY24 benefitting from the hikes and credit growth being robust and persistent. Prolonged rate cuts will eventually lead to narrowing NIM but we expect rate cuts to begin in the last quarter and hence the trend in the banking sector is likely to continue in FY24. NBFCs will be best positioned to benefit from cuts in rates as credit growth will improve followed by banks. Also, credit-sensitive sectors like auto and real estate will see higher demand.

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