 "PNB, Axis Bank, HDFC Bank others rise as RBI announces liquidity measures")
Nifty Bank and Nifty Financial Services gained 1.6 per cent and 1.9 per cent respectively, on Tuesday after the Reserve Bank of India (RBI) announced a three-pronged strategy to address tight liquidity conditions in the banking system. They were the biggest gainers among sectoral indices.
At close, 11 stocks of the Nifty Bank index advanced and one declined. Among the banking stocks, Punjab National Bank (PNB), and AU Small Finance Bank were up over 4 per cent. Axis Bank gained over 3 per cent, while IDFC First Bank and HDFC Bank over 2 per cent, and Bank of Baroda, and ICICI Bank over 1 per cent.
Similarly, on the Nifty Financial Service index, 13 stocks advanced and 7 declined. Among others, Cholamandalam Investment and Finance, and Bajaj Finance were up over 4 per cent, while Bajaj Finserv, and Shriram Finance gained over 3 per cent.
"The RBI’s announcement of measures to boost the liquidity in the banking system by around Rs 1.5 trillion is positive for the market. This raises the prospect of a rate cut by the Monetary Policy Committee of India (MPC) in the February policy meeting. Banks are likely to benefit," said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.
Emkay Global Financial Services believes that this is a more important move than an actual rate cut which is now anticipated in February as market rates respond immediately, and a rate cut without a liquidity injection is ineffective.
"The market reaction has been muted so far, with yields rallying by 5-10 basis points (bps) at the short-end, but by 2-3 bps at the long-end, given that the system is still net-deficit. However, we see a strong rally at the short-end as the RBI takes more steps to address the tight liquidity," Emkay said in its report.
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According to the brokerage, BFSI is the immediate beneficiary of the turn in liquidity. Deposit-hungry banks, where growth is limited by funding, are the best trades with preference for HDFC Bank, IndusInd Bank, and RBL. Value is also visible in the PSU bank basket, with valuations of second-line banks at 0.7 times – Bank of Baroda, Canara Bank, Punjab National Bank, and Union Bank of India in that order.
Nomura Research says that RBI’s cumulative actions on liquidity are a clear signal of intent, and it is setting the stage for a repo rate cut on February 7, a move that is long overdue considering the deceleration in domestic demand. The brokerage reiterates its view of a 25 bps repo rate cut in February, and 100 bps in total cuts, taking the terminal policy rate to 5.50 per cent by 2025 end.
Rajeev Radhakrishnan, CIO – Fixed Income, SBI Mutual Fund, says that the steps taken by the RBI are expected to infuse core liquidity of Rs 1 trillion and another Rs 50,000 crore through a slightly longer-term repo auction crossing the quarter.
On Monday, the central bank announced open market operations (OMO) to purchase government securities worth Rs 60,000 crore in three tranches of Rs 20,000 crore each on January 30, February 13, and February 20.
The RBI will also hold a 56-day variable rate repo (VRR) auction for Rs 50,000 crore on February 7 to ensure liquidity coverage until this financial year’s end. The date of the reversal of these funds will be close to the April monetary policy review.
The central bank also announced a $5 billion dollar-rupee buy-sell swap auction with a six-month tenor, scheduled for January 31. This is expected to inject about Rs 50,000 crore into the banking system. While foreign exchange participants anticipate pressure on forward premiums, they predict no significant impact on spot rates.
