BSE Bankex tanks on uncertainty over easing of inflation, policy rate cuts

Rate cuts by banks may not happen immediately as there will be higher demand for money due to festive season

After opening flat but in the positive zone, BSE Bankex has dropped 1.7% despite RBI meeting expectations of a CRR cut by 25 basis points in its monetary policy announcement today.  What has made the market nervous is hazy picture on inflation easing and policy rate cuts, which did not happen today and is not going to happen even in December policy. This is despite RBI revising growth forecast sharply down from 6.5% to 5.8% in FY13. On the other hand, RBI has revised its inflation projection upwards to 7.5% for FY13 from 7% indicated earlier in July. It expects inflation to rise further or remain firm in the current quarter before likely.

However market seems to have disbelief in that too and has taken the likely easing or rate cut forecasts as just hopes . CRR cut, which will release Rs 17,500 crore into the system, may not necessarily translate into rate cuts by banks immediately as there will be higher demand for money due to festive season, they would need to provide more now on restructured loans. moreover, some bankers have indicated for a wait and watch policy depending on RBI's signals for further policy action. Thus, banking stocks will remain under pressure in the near term, unless the inflation shows a clear and definite trend of receding, which looks difficult in the near term given firm oil prices, likely higher government borrowing (in the busy second half) and already high fiscal deficit.