Indian bank stocks drag Nifty, Sensex for the second straight day after RBI policy

• RBI’s move to raise the CRR on banks’ incremental NDTL will raise cost of funds and impact profitability, say experts.
• Bank Nifty has fallen by 183 points or 0.4% as of 12 pm on Friday, and BSE Banex by 164 points or 0.3%.
• Most private sector banks are trading in the red while a few public sector banks are trading in the green.
  

While the Reserve Bank of India’s (RBI) monetary policy committee (MPC) kept base rates unchanged the hawkish tone of the governor and an increasing inflation projection — have turned the stock markets jittery.

Banks will now have to deal with an increase in incremental cash reserve ratio (ICRR) for scheduled banks. In order to squeeze excess liquidity that has come in from the deposit of ₹2,000 notes into the system, the RBI has levied an ICRR of 10% must be maintained by banks for increase in net demand and time liabilities (NDTL) between May 19 to July 28.

“RBI’s decision to raise the CRR on bank’s incremental NDTL between May 19 and July 28 2023 to 10% is negative for banks. This will raise their cost of funds impacting their profitability. However, since banks are experiencing good credit growth and their non-performing assets (NPAs) are declining, they can easily absorb this marginal additional cost,” said Dr V K Vijayakumar, chief investment strategist at Geojit Financial Services.

Bank Nifty has been trading in the red since yesterday, and has fallen by 183 points or 0.4% as of 12 pm on Friday. BSE Bankex also fell by 164 points or 0.3% since morning.

However, it’s the private banks that are taking a bigger hit with ICICI Bank, HDFC Bank, Axis Bank and Kotak Mahindra Bank trading in the red, with the exception of Yes Bank and IndusInd. Meanwhile, SBI is one of the gainers of the day, and this seems to have rubbed off on other public sector banks like IDBI Bank, Bank of Baroda and Central Bank of India with all trading in the green.

Bank stock performance On August 11
Source: BSE data as of 12:20 pm

A look at bond yields

The RBI governor Shaktikanta Das said in the post policy press conference that this move could take out a tad over ₹1 lakh crore from the system, and that the liquidity adjustment facility (LAF) balance at ₹2 lakh crore. After the MPC meeting announcements, India’s 10-year bond yields closed four basis points lower to the previous day at 7.15%.

“The surprise move was asking banks to hold incremental CRR, where some friction in short end yields may be visible,” says Bank of Baroda.

Pankaj Pathak, fund manager of fixed income at Quantum AMC said that even after the ICRR increase, the Indian banking system will not be majorly impacted, as the banking system is sitting on a surplus of ₹1 trillion in the next 1-2 months.

“This should not have any durable impact on the bond yield curve though money market yields might inch up 10-15 basis points over the coming weeks,” Pathak adds.