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Banking stocks worst hit by RBI policy; ICICI Bank down over 1%

The BSE Banking index pared gains and plunged in deep red after the RBI in its policy meet on Tuesday kept the repo rate unchanged at 8%.

ET Online|
Updated: Aug 05, 2014, 01.23 PM IST
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The BSE Banking index pared gains and plunged in deep red after the RBI in its policy meet on Tuesday kept the repo rate unchanged at 8%.
The BSE Banking index pared gains and plunged in deep red after the RBI in its policy meet on Tuesday kept the repo rate unchanged at 8%.
NEW DELHI: The S&P BSE Banking index pared gains and plunged in deep red after the Reserve Bank of India (RBI) in its policy meet on Tuesday kept the repo rate unchanged at 8 per cent and slashed SLR by 50 basis points to 22 per cent.

At 12:40 pm, the BSE Banking index was trading 0.6 per cent lower compared to a 0.4 per cent drop seen in the BSE Sensex. The fall in the index was led by losses in ICICI Bank, Federal Bank, IndusInd Bank, Yes Bank and Axis Bank.

The BSE realty index was down by 0.6 per cent, led by losses in Indiabulls Real Estate (down 2.1 per cent), Sobha Developers (down 1.4 per cent), DLF (down 0.9 per cent), Prestige Estates (down 0.86 per cent) and Unitech (down 0.4 per cent).

ICICI Bank was trading 1.4 per cent lower at Rs 1469.45, while Federal Bank dropped 1.09 per cent to Rs 118.50.

IndusInd Bank slipped 0.75 per cent to Rs 549, Yes Bank and Axis Bank were trading 0.7 per cent lower at 538.65 and 388.30, respectively.

The RBI has cut the SLR ceiling by 50bps to 22 per cent and also reduced the HTM ceiling to 24 per cent. Currently, banks are permitted to exceed the limit of 25 per cent of total investments under the held to maturity (HTM) category provided the excess comprises only SLR securities, and banks' total holdings of SLR securities in the HTM category is not more than 24.5 per cent of their NDTL as on the last Friday of the second preceding fortnight.

In order to enable banks greater participation in financial markets, this ceiling is being brought down to 24 per cent of NDTL with effect from the fortnight beginning August 9, 2014.

“We believe it may not help the banks to generate liquidity, as the banks are already sitting with higher SLR 26-28%. So a 50bps cut in SLR may be negligible at the moment,” said Sanjeev Jain, Research Analyst- BFSI at Microsec capital Ltd.

“However, reduction in the HTM ceiling may give the room to the banks to reduce their holdings as per the market condition going forward,” he added.

Jain is of the view that on the debt market front, there may be a pressure on bond price, if the credit growth takes place going forward. As a result to generate more liquidity, the banks may reduce their holding in the bond market.

If you are reducing SLR, then it is obvious that the HTM numbers will also have to come down, say analysts. Right now, the systemic SLR is about 26.5 per cent, so this half percent reduction in SLR amounts to Rs 43,000 crore of additional liquidity for the private sector, they say.

"It also means Rs 43,000 crore going out of HTM into AFS. So, we will have to see how this impacts the banking system as a whole. But given that the tone is also hawkish, then this combination of a hawkish tone, SLR cut and HTM cut would mean that bond yields would probably move upwards," said Samiran Chakraborty, HoR-India, Standard Chartered Bank.

"This is definitely negative for the bond markets," he added.
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