Fear of hike in interest rates, liquidity drying up leads to carnage

Receding hopes of a rate cut amidst fears that RBI’s recent liquidity tightening measures could impact net interest margins of banks saw bank stocks being whipped on Dalal Street. Four PSU bank stocks, including the country’s premier bank State Bank of India, crashed to a new yearly low on Wednesday.

All-round sell-off

The carnage was not limited to PSU bank stocks but extended to private bank stocks too, that were so far the favourites of the analysts. As a result, the CNX Bank Nifty lost over 500 points.

A Nomura report said: “In addition to more liquidity tightening for banks at the margin, a rough calculation suggests an average impact of nearly 3-4 bps on NIMs due to the increase in minimum daily CRR balance to 99 per cent from 70 per cent earlier (if we assume that banks were maintaining 70 per cent balance for the entire fortnight and achieved the average daily balance only on the last day of the fortnight).”

What stoked investors’ fears appeared to be the perception that not only interest rates may not come down, but there was also the possibility of rates inching up as RBI’s measures aimed at curbing rupee volatility may lead to drying up of liquidity in the system.

SBI, Union Bank, BoI and Canara Bank hit fresh 52-week lows, with all the 12-bank stocks forming the Bank Nifty tanking. While some stocks managed to recover part of the lost ground, a few stuck close to their lowest price of the day as trading ended.

SBI hits new low

SBI dipped to a new low of Rs 1,786.35 before recovering to Rs 1,800 at the close of trading, a loss of Rs 60.95. But it was the Axis Bank stock which was the biggest loser, down by Rs 75.70 to close at Rs 1,127.15. The loss suffered by these two had a significant impact on the Bank Nifty which ended the day with a loss of about 519 points.

All private sector bank stocks in the Bank Nifty lost heavily.

HDFC Bank shed Rs 22.60 to close at Rs 661, ICICI Bank was down Rs 37.65 to end the day at Rs 952, Kotak Mahindra Bank lost Rs 42.50 to close at Rs 687.60, IndusInd Bank was down Rs 38.95 at Rs 424 at the end of trading and YES Bank shed a massive Rs 56.95 to close at Rs 381.70.

What may have spooked the stock prices of some of the private sector banks was the fact that their reliance on public deposits might impact their bottomline if the RBI raised the rates.

Not just the banking, but some of the interest rate sensitive stocks too, tanked. These included HDFC, IDFC and L&T, with the last two falling to new 52-week lows. HDFC closed the day down at Rs 807.50, a loss of Rs 19.35. IDFC touched a new 52-week low of Rs 116.80 before closing at Rs 117.


(This article was published on July 24, 2013)
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