Shares of 14 banks rose by 1.69% to 5.49% at 11:36 IST on BSE after the Reserve Bank of India left key interest rates unchanged at mid-quarter monetary policy review today, 18 December 2013.
Canara Bank (up 5.49%), Bank of India (up 5.05%), Union Bank of India (up 4.95%), IndusInd Bank (up 4.12%), Punjab National Bank (up 4.14%), Yes Bank (up 3.46%), Bank of Baroda (up 3.19%), Axis Bank (up 3.22%), State Bank of India (up 3.02%), IDBI Bank (up 2.95%), Federal Bank (up 2.23%), ICICI Bank (up 2.17%), Kotak Mahindra Bank (up 1.8%) and HDFC Bank (up 1.69%), edged higher.
The S&P BSE Bankex was up 1.82% at 13,030. It outperformed the S&P BSE Sensex, which was up 0.98% at 20,814.44.
The S&P BSE Bankex had outperformed the market over the past one month till 17 December 2013, rising 3.82% compared with the Sensex's 1.04% rise. The index had also outperformed the market in past one quarter, gaining 9.29% as against Sensex's 4.08% rise.
The Reserve Bank of India (RBI) kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 7.75%. The cash reserve ratio (CRR) of scheduled banks was also left unchanged at 4% of net demand and time liability (NDTL).
Consequently, the reverse repo rate under the LAF will remain unchanged at 6.75%, and the marginal standing facility (MSF) rate and the Bank Rate at 8.75%.
The yield on the benchmark federal paper 7.16% GS 2023 was hovering at 9.0948%, higher than its close of 9.2558% on Tuesday, 17 December 2013. Lower bond prices will result in diminution in value of bond holdings by banks. Bond yields and bond prices are inversely related.
In its assessment, RBI said that the outlook for global growth continues to remain moderate, with an uneven recovery across industrial countries. Activity in major emerging market economies (EMEs) barring China has decelerated on account of weak domestic demand, notwithstanding some improvement in export performance. While volatility in financial markets has receded, it could pick up again following the inevitable taper of quantitative easing in the US, given the large dependence of EMEs on external financing.
In India, retail inflation measured by the consumer price index (CPI) has risen unrelentingly through the year so far, pushed up by the unseasonal upturn in vegetable prices, double-digit housing inflation and elevated levels of inflation in the non-food and non-fuel categories. While vegetable prices seem to be adjusting downwards sharply in certain areas, the feed-through to much-too-high headline CPI inflation remains to be seen. Wholesale inflation has also gone up sharply from Q2 onwards, with upside pressures evident across all constituent components. High inflation at both wholesale and retail levels risks entrenching inflation expectations at unacceptably elevated levels, posing a threat to growth and financial stability. There are also signs of a resumption of high rural wage growth, suggesting second round effects that cannot be ignored. High and persistent inflation also increases the risks of exchange rate instability, RBI said.
The central bank added that while CPI and wholesale price index (WPI) inflation excluding food and fuel have been stable, despite a steady and necessary increase in administered prices towards market levels, the high level of CPI inflation excluding food and fuel leaves no room for complacency. There is, however, reason to wait before determining the course of monetary policy. There are indications that vegetable prices may be turning down sharply, although trading mark-ups could impede the full pass-through into retail inflation. In addition, the disinflationary impact of recent exchange rate stability should play out into prices. Finally, the negative output gap, including the recent observed slowdown in services growth, as well as the lagged effects of effective monetary tightening since July, should help contain inflation, it said.
RBI said it would be vigilant. Even though RBI maintains status quo at present, it can help guide market expectations through a clearer description of its policy reaction function: if the expected softening of food inflation does not materialise and translate into a significant reduction in headline inflation in the next round of data releases, or if inflation excluding food and fuel does not fall, the Reserve Bank will act, including on off-policy dates if warranted, so that inflation expectations stabilise and an environment conducive to sustainable growth takes hold. The Reserve Bank's policy action on those dates will be appropriately calibrated, it said.
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