Banks tumble after RBI says little room for more easing

Canara Bank (down 2.63%), Punjab National Bank (down 2.47%), State Bank of India (down 2.27%), Union Bank of India (down 1.84%), Axis Bank (down 1.61%), IDBI Bank (down 1.49%), ICICI Bank (down 1.48%), Bank of India (down 1.39%), Bank of Baroda (down 1.2%), Federal Bank (down 1.1%), HDFC Bank (down 0.89%), IndusInd Bank (down 0.17%), Yes Bank (down 0.08%) and Kotak Mahindra Bank (down 0.02%), edged lower.

The S&P BSE Bankex was down 1.44% at 14,323.09. It underperformed the S&P BSE Sensex, which was down 0.37% at 19,662.05.

The S&P BSE Bankex had outperformed the market over the past one month till 2 May 2013, rising 9.81% compared with the Sensex's 3.65% rise. The index had also outperformed the market in past one quarter, rising 0.46% as against Sensex's 0.23% fall.

The Reserve Bank of India (RBI) in its monetary policy review today, 3 May 2013, reduced the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.5% to 7.25% with immediate effect. The repo rate is the short-term rate at which the RBI lends cash to banks.

The reverse repo rate under the LAF, determined with a spread of 100 basis points below the repo rate, stands adjusted to 6.25% with immediate effect. The reverse repo rate is the short-term rate at which the central bank absorbs cash from the market.

The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, stands adjusted to 8.25% with immediate effect.

The Bank Rate stands adjusted to 8.25% with immediate effect. Banks use this rate to price long-term loans to firms and individuals.

The cash reserve ratio (CRR) of scheduled banks has been retained at 4% of their net demand and time liabilities (NDTL). The CRR is the percentage of banks' deposits which they must keep with the central bank.

RBI warned that a high current account deficit (CAD) poses the biggest risk by far to the Indian economy. A large CAD, appreciably above the sustainable level year after year, will put pressure on servicing of external liabilities. Should global liquidity conditions rapidly tighten, India could potentially face a problem of sudden stop and reversal of capital flows jeopardising our macro-financial stability, RBI said.

Without policy efforts to unlock the tightening supply constraints and bring enduring improvements in productivity and competitiveness, growth could weaken even further and inflationary strains could re-emerge, it added.

In its guidance, RBI said that the policy action undertaken in this review carries forward the measures put in place since January 2012 towards supporting growth in the face of gradual moderation of headline inflation. Recent monetary policy action, by itself, cannot revive growth. It needs to be supplemented by efforts towards easing the supply bottlenecks, improving governance and stepping up public investment, alongside continuing commitment to fiscal consolidation, the central bank said in a statement.

With upside risks to inflation still significant in the near term in view of sectoral demand supply imbalances, ongoing correction in administered prices and pressures stemming from MSP increases, monetary policy cannot afford to lower its guard against the possibility of resurgence of inflation pressures. Monetary policy will also have to remain alert to the risks on account of the CAD and its financing, which could warrant a swift reversal of the policy stance, RBI added.

Overall, the balance of risks stemming from the RBI's assessment of the growth-inflation dynamic yields little space for further monetary easing. The RBI will endeavour to actively manage liquidity to reinforce monetary transmission, consistent with the growth-inflation balance, RBI said.

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