Banks firm up as inflation eases

Fourteen bank shares rose by 0.58% to 3.44% at 10:08 IST on BSE after annual rate of inflation based on the combined consumer price indices declined in June 2014.

Union Bank of India (up 3.44%), IDBI Bank (up 3.17%), Canara Bank (up 3.06%), Bank of India (up 3.04%), Federal Bank (up 2.99%), ICICI Bank (up 2.66%), Bank of Baroda (up 2.34%), Axis Bank (up 1.88%), Punjab National Bank (up 1.83%), State Bank of India (up 1.80%), Yes Bank (up 1.54%), IndusInd Bank (up 1.03%), Kotak Mahindra Bank (up 0.91%) and HDFC Bank (up 0.58%), edged higher.

The S&P BSE Bankex 1.66% at 16,871.28. It outperformed the Sensex, which was up 0.83% at 25,213.85.

The S&P BSE Bankex had underperformed the market over the past one month till 14 July 2014, falling 4.13% compared with 0.88% fall in the Sensex. The index had, however, outperformed the market in past one quarter, rising 12.97% as against Sensex's 10.51% rise.

The annual rate of inflation based on the combined consumer price indices (CPI) for urban and rural India eased to 7.31% in June 2014, from 8.28% in May 2014, data released by the government after trading hours on Monday, 14 July 2014, showed. The rate of inflation based on the combined consumer food price indices (CFPI) for urban and rural India eased to 7.97% in June 2014, from 9.56% in May 2014, the data showed.

Bank shares rose on hopes that lower inflation may encourage the Reserve Bank of India (RBI) to keep a dovish stance on interest rates.

RBI kept its main lending rate viz. the repo rate unchanged at 8% and also kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4% of net demand and time liabilities (NDTL) after a monetary policy review on 3 June 2014. The central bank announced reduction in the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points to 22.5% of their NDTL from 23% with effect from the fortnight beginning 14 June 2014.

RBI had said that it remains committed to keeping the economy on a disinflationary course, taking CPI inflation to 8% by January 2015 and 6% by January 2016. If the economy stays on this course, further policy tightening will not be warranted, the central bank said. On the other hand, if disinflation, adjusting for base effects, is faster than currently anticipated, it will provide headroom for an easing of the policy stance, the RBI said.

RBI's third bi-monthly monetary policy statement is scheduled on 5 August 2014.

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