Banks slide as RBI keeps rates unchanged

Axis Bank (down 1.67%), Canara Bank (down 1.34%), IDBI Bank (down 1.18%), State Bank of India (down 1.13%), ICICI Bank (down 0.93%), Punjab National Bank (down 0.88%), Federal Bank (down 0.85%), Bank of India (down 0.61%), Yes Bank (down 0.60%), HDFC Bank (down 0.49%), Kotak Mahindra Bank (down 0.44%), IndusInd Bank (down 0.41%) and Union Bank of India (down 0.40%), edged lower.

The BSE Bankex was down 0.53% at 14,198.04. It underperformed the Sensex, which was up 0.05% at 19,254.22.

The Bankex had outperformed the market over the past one month till 17 December 2012, rising 9.62% compared with the Sensex's 5.11% rise. The index had also outperformed the market in past one quarter, rising 13.43% as against Sensex's 3.79% rise.

 

On the basis of the current macroeconomic assessment, the Reserve Bank of India (RBI) kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4.25% of their net demand and time liabilities. It kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8%. Consequently, the reverse repo rate under the LAF remained unchanged at 7%, and the marginal standing facility (MSF) and the bank rate at 9%.

RBI stated that global economy has shown some signs of stabilisation although the situation remains fragile. On the domestic front, there are some incipient signs of pick-up though growth remains significantly below its recent trend.

RBI said money supply (M3) growth remained below its indicative trajectory because of lower deposit growth. Non-food credit growth rose above the indicative trajectory of 16% suggesting some pick-up in economic activity.

In its outlook, RBI said that lead indicators point to a modest firming up in the momentum of global growth over the rest of 2012 and in 2013 if there is firm policy action in the euro area and the US. The biggest risk to the outlook stems from political economy considerations that could impede, delay or erode resolute policy action. The consequences could be deepened financial stress and heightened risk aversion. For emerging and developing economies (EDEs), the threat of spillovers remains significant in view of the depressed outlook for global trade and volatile capital flows. Although inflation pressures appear to be moderating, elevated food and commodity prices remain contingent risks, especially for EDEs facing domestic supply constraints, RBI added.

On the domestic front, RBI said GDP growth is evolving along the baseline projection of 5.8% for 2012-13 set out in the second quarter review (SQR). The recent policy initiatives by the Government and further reforms should help to boost business sentiment and improve the investment climate. As regards inflation, excess capacity in some sectors is working towards moderating core inflation. Furthermore, the easing of international commodity prices, particularly of crude, is expected to impart some softening bias to the evolving inflation conditions if it is not offset by the impact of rupee depreciation. RBI is closely monitoring the evolving growth-inflation dynamic and will update the formal numerical assessment of its growth and inflation projections for 2012-13 as part of the third quarter review in January 2013, the central bank added.

In its guidance, RBI said that headline inflation has been below its projected levels over the past two months. The decline in core inflation has also been comforting. These emerging patterns reinforce the likelihood of steady moderation in inflation going into 2013-14, though inflation may edge higher over the next two months. In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards. Liquidity conditions will be managed with a view to supporting growth as stated in the SQR, thereby preparing the ground for further shifting the policy stance to support growth. Overall, recent inflation patterns and projections provide a basis for reinforcing RBI's October guidance about policy easing in the fourth quarter. However, risks to inflation remain and accordingly, even as the policy emphasis shifts towards growth, the policy stance will remain sensitive to these risks, RBI said.

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