BackWhy banking stocks are rising after RBI policy announcement — explained
RBI repo rate hike is expected to help Indian banks to improve its margins in short term, which has fueled buying in banking sector, believe stock market experts
PremiumThe Reserve Bank of India (RBI) today announced a 50 bps rate hike after its Monetary Policy Committee (MPC) meeting. This RBI's move received positive response from the stock market, especially banking sector stocks. Banking majors like Kotak Mahindra Bank, Federal Bank, HDFC Bank and Bank of Baroda surged to the tune of 2 per cent, paring all its losses in early morning deals. Likewise, shares of Axis Bank, ICICI Bank and State Bank of India or SBI shot up around 1 per cent after the RBI policy announcement.
“The Reserve Bank of India (RBI) hiked repo rates by 50 basis points to 5.90 per cent. With this rate hike they have further closed the gap between inflation and interest rates which currently stands at 7 per cent. We are in a much better position compared to all the other major global economies which are still struggling with high inflation and falling behind the curve. With the gap between our inflation and interest rates narrowing we expect the quantum and speed of rate hikes to reduce going forward," said Apurva Sheth, Head of Market Perspectives, Samco Securities.
According to stock market experts, RBI's policy announcement was on expected lines and with the festive season round the corner, the higher loan demand is expected to help banking companies to improve their margins. They also said that RBI rate is also positive for the rupee which has fallen over 7% since April this year. With higher interest rates, banks will have more liquidity now as they are expected to attract more savings from the account holders.
The recent 50 bps rate hike was crucial considering the global environment and inflation concerns. It is important to note that despite the global headwinds, the governor’s view on the Indian economy is constructive. However, to ensure that the current recovery sustains, the government needs to increase spending. Key concerns mentioned in the commentary were global & geopolitical uncertainties, rising crude oil prices, and prolonged rains leading to food inflation. In short, we believe that the is a possibility of a further rate hike albeit a less severe one in the upcoming meeting.
Speaking on the reason for spurt in banking stock price after RBI repo rate hike decision, Ravi Singhal, CEO at GCL Securities said, "Banking stocks are rising due to rise in RBI repo rate to 5.90 per cent. This move is expected to divert more debt investment money towards banks leading to improvement in its margins in upcoming quarter. This move is expected to provide more liquidity to the banks higher interest rates, which may lead to rise in savings interest rates as well."
Rupee vs dollar
Expecting rebound in Indian rupee after this RBI's move, Anuj Gupta, Vice President — Research at IIFL Securities said, "This repo rate hike would enable Indian rupee to find its lost ground against the US dollar. The expected strength in Indian rupee against the US dollar will help improve Current Account Deficit (CAD) of Indian banks, which is one of the major reason for rise in banking stocks after the RBI policy announcement."
Banking stocks to buy now
Asked about the banking stocks that one can buy after the RBI MPC meeting outcome, Anuj Gupta of IIFL said that ICICI Bank, HDFC Bank and SBI have good exposure in overseas merchandise and they have better forex reserves too. As rupee is expected to gain against the US dollar in short term, these banking stocks are expected to outperform its peers in upcoming quarter.
After the RBI's repo rate hike announcement, Nifty Bank index shot up 2.50 per cent, while the financial index gained 1.6 per cent whereas energy index surged 1.4 per cent.
RBI's monetary policy committee (MPC) has hiked the key policy rate by 190 bps since May to 5.9 per cent to cool off domestic retail inflation that has stayed sticky above the RBI's tolerance limit of 6 per cent since January 2022.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.
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