Banking stocks feel repo heat

Reacting to a hike in the repo rate or the rate at which the Reserve Bank of India lends money to banks, banking stocks fell by nearly 4 per cent in the first hour of trade as investors went short on the banking counters.

However, in keeping with the broader market trend, banking stocks recovered towards the end of the trading session as traders covered their shorts.

The Bombay Stock Exchange (BSE) Bankex, which tracks shares of banks, closed at 7037.89 points, up 0.28 per cent or 19.47 points. Major gainers in the banking pack include State Bank of India (up 2.31 per cent to Rs 1339.7 a share), ICICI Bank (up 0.09 per cent to Rs 742.3 a share) and YES Bank (up 2.6 per cent to Rs 140.35 a share).

Yesterday's hike takes the repo rate to the highest since November 2002. A hike in repo rate indicates that banks should manage their own liquidity while being cautious of overlending.

Bankers and analysts feel that RBI's move is not unexpected since a 10 per cent hike in fuel prices announced on June 4 is expected to add a further 0.6 ppt to inflation. Broking houses expect further policy measures to combat inflation.

"This move is in the right direction and not entirely unexpected. In our view, a tightening bias in monetary policy will continue in the near term. We expect the repo rate to increase by a further 25 bps in the next policy meet on July 29. We also expect a further 50 bps increase in the CRR in the remainder," said Tushar Poddar, vice-president, Asia Economics Research at Goldman Sachs, in a research note.

Analysts also feel that while bank margins will come under pressure, large private banks such as ICICI Bank, HDFC Bank and Axis Bank are better poised to deal with the repo rate hike.

"The trade-off between margin and growth has deteriorated for banks. In the near term, there is a large overhang on the banking sector but banking stocks are good buys for the long term since valuations look attractive now. We find the large private banks attractive at the current levels," said Vaibhav Agrawal, banking analyst at domestic broking house Angel Broking.

In April, RBI had raised the cash reserve ratio (CRR) or the amount of money that banks must keep with the central bank by 75 basis points to 8.25 per cent but the impact had largely been absorbed by the banks.