Bank stocks pounded

The rather cautious stance taken by the RBI Governor Raghuram Rajan with regard to interest rates, cutting repo rate by 25 bps but leaving other key rates like CRR untouched, took a toll on the bank stocks with the Bank Nifty losing nearly 350 points.

More than the RBI Governor’s decision today, his comments on the not-so-benign outside environment indicating that he would not rush into making any further rate cut in the near future that probably made the market to take a dive.

IndusInd was the biggest loser in terms of value, shedding ₹23.45 to trade at ₹859.50. Canara Bank, which was down by ₹9.25 at ₹333.50, Axis Bank which lost ₹12.25 at ₹566.20, Yes Bank that shed ₹18.10 to slip to ₹861.45, HDFC Bank which lost ₹17.15 to trade at ₹1019.05 and Kotak Mahindra which shed ₹25.75 at ₹1367 were among the other major losers.

Index heavyweight SBI posted a loss of ₹5.95 at ₹272.25 and ICICI Bank was trading at ₹311, a loss of ₹5.45. The other Bank Nifty constituents like PNB, Federal Bank, BoB and BoI were able to limit their losses.

But as many analysts point out that more than the RBI Governor’s decision to restrict the cut in rates to repo rate but rather his comments drawing to attention to the headwinds facing the country that probably made the market cautious. Explaining the policy stance and rationale, he pointed out that of the risks to inflation that were identified early in the year "three still cloud the picture". He mentioned the prediction of a below-normal South West monsoon, firming up of crude prices amidst significant volatility and the fact that any volatility in "external environment could impact inflation" as some of them.

The RBI Governor said that "therefore, a conservative strategy would be to wait, especially for more certainty" on both the monsoon outcome and the effects of government responses if the monsoon turns out to be weak. He argued that a more appropriate stance would be to `front-load a rate cut today and then wait for data that clarify uncertainty’. In the meanwhile he suggested ` banks should pass through the sequence of rate cuts into lending rates’.

This implied, to market participants, that he might not rush into making any hasty decision to cut the rates further. This had an impact on the bank stocks.

Commenting on the RBI decision, Dinesh Thakkar, CMD, Angel Broking, Mumbai, described the decision as "along expected lines". But he felt that "proactive government measures on food grains supply" might lead to "inflation surprising positively" that would offer room for more rate cuts post- monsoon.

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