bank stocks: RBI policy outcome expected but what brought bank stocks under pressure?

Although there were no negative surprises in the Reserve Bank of India’s August monetary policy announcements, the imposition of incremental Cash Reserve Ratio (ICRR) placed banks under selling pressure on Thursday. The Nifty Bank index fell 0.72% or over 300 points to 44,558 with all 12 stocks in the red. The declines were led by ICICI Bank, Bandhan Bank and AU Small Finance Bank.

The move is expected to suck liquidity worth Rs 90,000 crore in the system.

RBI mandated banks to maintain the ICRR at 10% of the net demand and time liabilities (NDTL) between May 19 and July 28. The Monetary Policy Committee (MPC) of the RBI led by Governor Shaktikanta Das today kept the repo rate unchanged at 6.5% while increasing the inflation estimates for FY24 to 5.4% from an earlier estimate of 5.10%. It kept the GDP estimates unchanged.

The RBI Governor said that the level of surplus liquidity in the system has gone up in recent months on the back of a return of Rs 2,000 banknotes to the banking system.

Das, however, said that the above measure was temporary and only for managing the liquidity overhang while allaying fears about the liquidity worries. “Even after this temporary impounding, there will be adequate liquidity in the system to meet the credit needs of the economy.”

The Governor said that the ICRR will be reviewed on September 8, 2023, or earlier with a view to returning the impounded funds to the banking system ahead of the festival season.

The RBI MPC also left the cash reserve ratio (CRR) unchanged at 4.5%. “The temporary incremental CRR increase is a reaction to the sharp increase in systemic liquidity overhang, which is attributed primarily to the demonetisation of Rs 2,000 notes. We expect this measure to be reversed as systemic liquidity approaches balance. At the same time, we believe that by maintaining its liquidity tightening stance, the RBI maintained its concern about upside inflation risk,” Sujan Hajra, Chief Economist & Executive Director at Anand Rathi Shares and Stock Brokers said.

“If the RBI’s current assessment of inflation as transitory holds true, we expect the RBI to maintain the status quo for the next year,” he added. He does not rule out another 25-bps rate hike if the inflation exceeds the RBI’s forecast in the near term.

The other rate-sensitive sectors — auto and realty — also turned negative. While Nifty Auto fell 0.34%, the Nifty Realty index was down by 0.12% around 10:40 am, after starting the day in the green. At least 10 stocks in the 15-share Nifty Auto index were trading in the red around this time while four counters in the 10-stock Nifty Realty declined.

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