Indian equity funds investing in banking stocks fell the most in the week to 15 February after the central bank for the second time in two months raised the amount of cash lenders must keep as deposit cover, to curb inflation.
“Even though the cut in cash reserve ratio was not a surprise, it took its toll on banking stocks,” Dhirendra Kumar, managing director at fund tracking company Value Research, said. “There is a fear in the market that there would be a liquidity squeeze and banks may have less to lend. The cost of borrowing will also rise.”
As a consequence average net asset values of two banking funds fell 5.36% in the past week compared with the 5.43 % decline in the sector index, data from fund tracking company Value Research showed on 19 February.
Starting 3 March, banks must keep cash equivalent to 6% of deposits, compared with 5.5 % now, the Reserve Bank of India (RBI) said on 13 February. The increase will drain as much as 140 billion rupees from the banking system at a time when the second-fastest-growing major economy is experiencing robust credit growth.
The move could erode banks’ ability to increase lending in an economy that is poised to expand at 9.2% in the year to 31March, following a record 9% growth in the previous year. Bank loans expanded more than 30 % in the previous two financial years, according to central bank data.
The increase in the cash reserve ratio led to several state-owned banks raising their prime lending rates. Credit Suisse also downgraded two leading Indian lenders. ICICI Bank Ltd., the country’s second-largest lender, was downgraded to “underperformer” from “outperformer.”Home-mortgage lender Housing Development Finance Corporation(HDFC) was downgraded to “underperformer” from “neutral.”