Bank stocks recover in volatile trade after RBI cuts policy rate by 25 basis points

Eleven bank stocks fell by 0.02% to 2.43% and four bank stocks rose by 0.11% to 1.14% at 11:30 IST on BSE after the Reserve Bank of India reduced the policy repo rate by 25 basis points and increased reverse repo rate by 25 basis points.

The Reserve Bank of India (RBI) announced its first bi-monthly monetary policy during market hours today, 5 April 2016.

Meanwhile, the S&P BSE Sensex was down 175.52 points or 0.69% at 25,224.13.

Among public sector banks, Punjab National Bank (up 0.46%) and Allahabad Bank (up 1.14%) gained. Corporation Bank (down 0.12%), Bank of Baroda (down 0.13%), Bank of India (down 0.3%), Union Bank of India (down 0.47%), and Canara Bank (down 0.23%) edged lower.

State Bank of India (SBI) declined 0.82% to Rs 193.40. The stock hit high of Rs 194.61 and low of Rs 190.55 so far during the day.

Among private sector banks, Axis Bank (up 0.22%) and Federal Bank (up 0.11%) gained. ICICI Bank (down 2.43%), Kotak Mahindra Bank (down 1.16%), Yes Bank (down 1.25%), and IndusInd Bank (down 0.44%) edged lower.

HDFC Bank declined 0.02% to Rs 1,069.05. The stock hit high of Rs 1,076.65 and low of Rs 1,061.85 so far during the day.

On the basis of an assessment of the current and evolving macroeconomic situation, RBI has decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points (bps) from 6.75% to 6.5%. It has reduced the minimum daily maintenance of the cash reserve ratio (CRR) from 95% of the requirement to 90% with effect from the fortnight beginning 16 April 2016, while keeping the CRR unchanged at 4% of net demand and time liabilities (NDTL). The RBI has narrowed the policy rate corridor from +/-100 basis points (bps) to +/- 50 bps by reducing the marginal standing facility (MSF) rate by 75 basis points and increasing the reverse repo rate by 25 basis points, with a view to ensuring finer alignment of the weighted average call rate (WACR) with the repo rate. Consequently, the reverse repo rate under the LAF stands adjusted to 6% and the MSF rate to 7%. The bank rate which is aligned to the MSF rate also stands adjusted to 7%, RBI added.

Meanwhile, the central bank announced the fine-tuning of its liquidity management framework. The central bank said in a statement that it has decided to smooth the supply of durable liquidity over the year using asset purchases and sales as needed. With a view to ensuring finer alignment of the weighted average call rate (WACR) with the repo rate, the central bank raised the reverse repo rate by 25 basis points to 6% and cut the marginal standing facility (MSF) rate by 75 basis points to 7%. The central bank reduced the minimum daily maintenance of the cash reserve ratio (CRR) to 90% from 95% with effect from the fortnight beginning 16 April 2016 even as it kept the CRR unchanged at 4% of net demand and time liabilities (NDTL). The RBI said it would continue to provide liquidity to the banking system as required. The RBI will progressively lower the average ex ante liquidity deficit in the system from one per cent of NDTL to a position closer to neutrality. The RBI simultaneously announced open market operations for purchases of government securities (GSec) totaling Rs 15000 crore on 7 April 2016. The RBI also said that it will explore the possibility of licensing other differentiated banks such as custodian banks and banks concentrating on whole-sale and long-term financing. A paper in this regard will be put out for comments by September 2016. The BSE Bankex had outperformed the market over the past one month till 4 April 2016, gaining 5.51% compared with Sensex's 3.06% rise. The index had, however, underperformed the market in past one quarter, falling 2.61% as against Sensex's 0.87% fall.

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