Bank shares in demand

Shares of 14 banks rose by 4.67% to 14.99% at 9:26 IST on BSE after the Reserve Bank of India on Tuesday announced measures to shield banks from incurring financial losses due to declining bond prices.

Yes Bank (up 14.99%), Canara Bank (up 9.15%), IndusInd Bank (up 8.93%), Union Bank of India (up 8.04%), Punjab National Bank (up 8.01%), Bank of Baroda (up 7.76%), Bank of India (up 6.37%), Axis Bank (up 6.19%), Kotak Mahindra Bank (up 5.83%), Federal Bank (up 5.71%), State Bank of India (up 5.56%), HDFC Bank (up 5.01%), ICICI Bank (up 4.82%) and IDBI Bank (up 4.67%), edged higher.

The S&P BSE Bankex was up 5.59% at 11,098.41. It outperformed the S&P BSE Sensex, which was up 1.18% at 18,460.46.

The S&P BSE Bankex had underperformed the market over the past one month till 20 August 2013, sliding 16.20% compared with the Sensex's 9.45% decline. The index had also underperformed the market in past one quarter, falling 30.27% as against Sensex's 9.78% fall.

The Reserve Bank of India (RBI) said after market hours on Tuesday, 20 August 2013, relaxed some rules that will help banks deal with the notional or marked-to-market loss in their government bond portfolios due to a recent sharp fall in bond prices.

The RBI said that it would repurchase government bonds to increase the availability of cash in the banking system, a step that appears to be a partial reversal of the slew of measures it took since mid-July to tighten liquidity. In a late evening news release, the RBI said it would buy back Rs 8000 crore of government bonds on Friday, 23 August 2013. Further repurchase will depend on evolving market conditions, it said. It is important to ensure that the liquidity tightening doesn't harden long-term bond yields and impact the flow of credit to productive sectors of the economy, the central bank said, referring to its buyback plan.

The RBI also relaxed some rules that will help banks deal with the notional or marked-to-market loss in their government bond portfolios due to a recent sharp fall in bond prices. They now don't have to record their current marked-to-market losses immediately as the RBI has allowed them to spread the losses equally over the remaining period of this fiscal year.

India's benchmark 10-year government bond yield surged in the past few days due to a weak rupee. Lower bond prices result in diminution in value of bond holdings by banks. Bond yields and bond prices are inversely related.

At 9:26 IST, the benchmark 10-year bond yield was trading at 8.3447%. The partially convertible rupee was trading at 63.36 per dollar.

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