Banking shares rally as RBI keeps key rate unchanged

Canara Bank, Union Bank of India, BoI, YES Bank, BOB, HDFC Bank and SBI are up 3-6% on the NSE.

Banking shares have rallied up to 6% after the Reserve Bank India (RBI) kept key rates unchanged in its mid-quarter monetary policy review today.

Canara Bank, Union Bank of India, Bank of India, YES Bank, Bank of India, HDFC Bank and State Bank of India (SBI) has surged between 3-6% on the National Stock Exchange (NSE).

The NSE banking share index Bank Nifty has gained 3% compared to 1.25% rise in benchmark CNX Nifty at 1105 hours.

The repo, Cash Reserve Ratio (CRR) as well as Marginal Standing Facility (MSF) were kept unchanged. The repo rate stands at 7.75%, CRR at 4% of banks' net demand and time liabilities while MSF rate at 8.75%. The Central Bank had been widely expected to lift its repo rate by 25 basis points.

"The policy decision is a close one. Current inflation is too high. However, given the wide bands of uncertainty surrounding the short term path of inflation from its high current levels, and given the weak state of the economy, the inadvisability of overly reactive policy action, as well as the long lags with which monetary policy works, there is merit in waiting for more data to reduce uncertainty," the Reserve Bank of India said in a statement.

There are indications that vegetable prices may be turning down sharply, although trading mark-ups could impede the full pass-through into retail inflation. In addition, the disinflationary impact of recent exchange rate stability should play out into prices. Finally, the negative output gap, including the recent observed slowdown in services growth, as well as the lagged effects of effective monetary tightening since July, should help contain inflation, it added.

Among the individual stocks, Canara Bank has surged 6%, Bank of India by 5%, followed by Union Bank of India, SBI, Punjab National Bank and IndusInd Bank are up 3-4%.