Banks firm up after RBI cuts repo rate, CRR

Axis Bank (up 4.26%), ING Vysya Bank (up 2.97%), State Bank of India (up 1.47%), IDBI Bank (up 1.20%), Union Bank of India (up 1.03%), Punjab National Bank (up 0.93%), Kotak Mahindra Bank (up 0.90%), Federal Bank (up 0.87%), ICICI Bank (up 0.71%), Canara Bank (up 0.54%) and Bank of Baroda (up 0.22%), edged higher.

However, IndusInd Bank (down 1.02%), HDFC Bank (down 0.75%), Yes Bank (down 0.45%) and Bank of India (down 0.08%), edged lower.

The BSE Bankex was flat at 14665.89. The BSE Sensex was also flat at 20105.09.

The BSE Bankex had underperformed the market over the past one month till 28 January 2013, rising 2.32% compared with the Sensex's 3.39% rise. The index had, however, outperformed the market in past one quarter, rising 10.94% as against Sensex's 7.94% rise.

The Reserve Bank of India (RBI) has decided to reduce the policy repo rate, the short-term rate at which the RBI lends cash to banks, under the liquidity adjustment facility (LAF) by 25 basis points from 8% to 7.75% with immediate effect.

Accordingly the reverse repo rate, the short-term rate at which the central bank absorbs cash from the market, under the LAF, determined with a spread of 100 basis points below the repo rate, stands adjusted to 6.75% with immediate effect.

The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, stands adjusted to 8.75% with immediate effect.

RBI has also decided to reduce the cash reserve ratio (CRR), the percentage of banks' deposits which they must keep with the central bank, of scheduled banks by 25 basis points from 4.25% to 4% of their net demand and time liabilities (NDTL) effective the fortnight beginning 9 February 2013.

As a result of this reduction in the CRR, around Rs 18000 crore of primary liquidity will be injected into the banking system.

In its guidance, RBI said that with headline inflation likely to have peaked and non-food manufactured products inflation declining steadily over the last few months, there is an increasing likelihood of inflation remaining range-bound around current levels going into 2013-14. This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks. The above policy guidance will, however, be conditioned by the evolving growth-inflation dynamic and the management of risks from twin deficits, it added.

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