Bank stocks lead Sensex, Nifty crash as credit policy disappoints

• Private bank stocks crashed on Thursday trade, with BSE Bankex falling by 936 points, and Nifty Bank by 806 points.
• RBI kept its FY24’s inflation projections unchanged, and sees Q1 of FY25’s inflation at 5%.
• Investors slashed positions in financial stocks as RBI is not showing signs of rate cut in the near term, say analysts.

Indian benchmark indices which opened on a positive due to US markets rally, crashed on Thursday trade. Sensex shed 723 points and Nifty nosedived by 212 points after RBI’s Monetary Policy Committee (MPC) kept key policy rates unchanged and remained focussed on ‘withdrawal of accomodation’ in its February policy review.

The RBI also raised FY24’s GDP growth projections to 7.3%, and that of FY25 to 7%. This too did not cheer the markets as it kept its FY24’s inflation projections unchanged, and also sees Q1 of FY25’s inflation at 5%, well above its 4% target. It projects FY25’s retail inflation at 4.5%, provided there is a normal monsoon.

“The MPC will carefully monitor any signs of generalisation of food price pressures which can fritter away the gains in easing of core inflation,” said RBI Governor Shaktikanta Das.

The commentary has disappointed the street, with almost all banking indices slumping by 1%. "The RBI remains vigilant on inflation & banking liquidity. The incomplete transmission of the cumulative 250 bps and the inflation ruling above the target level adds uncertainty about the timing of the interest rate reduction,” said Vinod Nair, head of research, Geojit Financial Services.

Most economists now believe that the possibility of a rate cut has been pushed back.“Based on the RBI’s assessment of inflation and its new interpretation of the policy stance, any rate cut before August-2024 policy looks unlikely. By August, we will have a fair understanding of the monsoon progress and sowing trends to make a reasonable assessment of the food inflation in FY25,” said Pankaj Pathak, Fund Manager- Fixed Income, Quantum AMC.

BSE Bankex fell by 936 points, while Nifty Bank fell by 806 points. Most of this fall is seen in private banks because Nifty PSU Bank gained 2% at the end of the day. Kotak Bank and Axis Bank were amongst Nifty50’s top losers as they fell by 3.5% and 3% each.

“Selling intensified after the RBI's monetary policy announcement in the first half with heavy selling in private banking scrips leading the slump. Banking industry has been facing liquidity issues in recent times and with the central bank's decision showing no signs of interest rate cut in the near term, investors slashed their positions in financial stocks,” said Prashanth Tapse, senior VP of research), Mehta Equities.

Nifty IT, Nifty Media and Nifty Oil & Gas were the only ones that closed in the green, along with midcaps. The sharp gains in IT and oil & gas stocks helped markets pare some of the losses. Analysts however say the underlying sentiment remains sluggish to negative.

SBI, BPCL, Power Grid, Coal India and Hindalco were amongst the top gainers in Nifty50, while Britannia, Nestle and Eicher Motors were also the top losers on Thursday.