Shares of 11 out of 14 banks fell by 0.09% to 2.4% at 11:46 IST on BSE after the Reserve Bank of India raised key interest rates by 25 basis points at the third quarter review of monetary policy for 2013-14 today, 28 January 2014.
IndusInd Bank (down 2.4%), HDFC Bank (down 1.11%), Axis Bank (down 1.03%), Kotak Mahindra Bank (down 0.88%), Bank of India (down 0.86%), Punjab National Bank (down 0.79%), ICICI Bank (down 0.6%), Canara Bank (down 0.45%), IDBI Bank (down 0.17%), Union Bank of India (down 0.14%) and Yes Bank (down 0.09%), edged lower.
State Bank of India (up 0.13%), Federal Bank (up 0.13%) and Bank of Baroda (up 0.03%), edged higher.
The S&P BSE Bankex was down 1.05% at 11,930.27. It underperformed the S&P BSE Sensex, which was down 0.40% at 20,623.81.
The S&P BSE Bankex had underperformed the market over the past one month till 27 January 2014, falling 7.78% compared with the Sensex's 2.29% fall. The index had underperformed the market in past one quarter, faliing 3.12% as against Sensex's 0.12% rise.
The Reserve Bank of India (RBI) increased the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.75% to 8%.
RBI kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4% of net demand and time liability (NDTL).
Consequently, the reverse repo rate under the LAF stands adjusted at 7%, and the marginal standing facility (MSF) rate and the bank Rate at 9%.
In its assessment, RBI said that since the mid-quarter review of December 2013, the global recovery is gaining traction, led by the strengthening of the US economy, but it is still uneven and subdued in the Euro area and Japan, and a slowdown in China seems to be underway. Notwithstanding the boost from stronger external demand, uncertainty continues to surround the prospects for some emerging economies, with domestic fragilities getting accentuated. Financial market contagion is a clear potential risk, it said.
Domestically, some loss of momentum of growth is likely in Q3 of 2013-14, despite a strong pick-up in rabi sowing. Industrial activity remains in contractionary mode, mainly on account of manufacturing, which declined for the second month in succession during Q3. Consumption demand continues to weaken and lacklustre capital goods production points to stalled investment demand. Fiscal tightening through Q3 and Q4 is likely to exacerbate the weakness in aggregate demand. Lead indicators of services suggest a subdued outlook, barring some pick-up in transport and communication activity, RBI said in a statement.
The Dr. Urjit Patel Committee has indicated a glide path for disinflation that sets an objective of below 8% CPI inflation by January 2015 and below 6% CPI inflation by January 2016. RBI's baseline projections set out in the accompanying review of macroeconomic and monetary developments for Q3 of 2013-14 indicate that over the ensuing 12-month horizon, and with the current policy stance, there are upside risks to the central forecast of 8%. An increase in the policy rate will not only be consistent with the guidance given in the mid-quarter review but also will set the economy securely on the recommended disinflationary path.
The extent and direction of further policy steps will be data dependent, though if the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture, RBI said.
The central bank said that if policy actions succeed in delivering the desired inflation outcome, real GDP growth can be expected to firm up from a little below 5% in 2013-14 to a range of 5% to 6% in 2014-15, with risks balanced around the central estimate of 5.5%. A pick-up in investment in an environment in which external demand continues to be supportive of export performance could impart an upside to this forecast.
Hereafter, following the recommendation of the Dr. Urjit Patel Committee, monetary policy reviews will ordinarily be undertaken in a two-monthly cycle, consistent with the availability of key macroeconomic and financial data. Accordingly, the next policy review is scheduled on Tuesday, 1 April 2014, RBI said.
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