Mumbai: Bank shares rose sharply on Tuesday after India’s central bank announced it would keep interest rates steady, belying stock market fears of a rise in a key lending rate.
The Reserve Bank of India (RBI) left the repo rate at 6.00% and also refrained from raising any other rate. Further, it reduced the risk weightage for small home-mortgage loans.
“Market was expecting 25 basis points increase in repo rate and it did not come,” said Sarika Purohit Lohra, an analyst with Angel Broking.
At 1.14 pm, more than an hour after the policy announcement came, the BSE bank index was trading 3.86% higher at 7,147.74 points.
Shares in leading lenders such as State Bank of India, ICICI Bank Ltd, Bank of Baroda and Punjab National Bank were 3.2% to 7.5%.
Active buying was also seen in the futures of Bank Nifty trading at a slight premium to the spot index, rising from a discount before the policy announcement.
“All interest rate sensitive stocks will heave a sigh of relief,” an analyst with a foreign brokerage said referring to the potential of tight money policy to crimp demand for bank credit, financial services, automobiles and housing.
Though there was no pressure on liquidity, the analyst said, the appreciation of the rupee against the dollar may force the RBI to pump in more money into the system that could fuel inflation.
“Its a tightrope to control exchange rate, inflation as well as interest rate,” the analyst said.
The decision to reduce the risk weightage on housing loans to 50% from 75% was also welcome, Ananthakrishna, chairman of Karnataka Bank, said. “These will leave some little room on the capital adequacy ratio,” he said.