Short term rates expected to spike.
By R. Chandrasekaran
CHENNAI: The banking stocks suffered the most in the Indian stock exchanges on Wednesday after the Reserve Bank of India’s announcement late on Tuesday advising the banks to hold higher average cash reserve ratio to tighten the money supply in an effort to protect the Indian currency.
Though the recent steps taken by the government and the RBI were termed as stumbling blocks for economic growth, the largest bank in India, State Bank of India has come in support of the central bank’s efforts to protect the Rupee at the cost of growth.
The SBI chairman Pratip Chaudhuri told a television channel that the Rupee would have weakened further if the RBI has not taken the recent initiatives to guard it. He defended the efforts to hold the Indian currency under 60 level.
On Tuesday, the central bank reduced the borrowing limit under the daily liquidity adjustment facility or LAF for every bank to 0.5 percent of the total deposits with immediate effect from one percent. This effectively limits the door for accessing borrowed funds from the RBI. This is expected to spike short term rates.
The banking regulator also increased average cash reserve ratio (CRR) to 99 percent of the requirement on a day-to-day basis from 70 percent stipulated by it before the new norms. This may force the banks to maintain at least 4 percent of CRR throughout the fortnight.
Only a week ago, the RBI capped the overnight borrowing limits to Rs.750 billion compared to the requirement of Rs.930 billion. This effort failed to hold on though it had limited impact. The continuous tightening of money supply is predicted to reduce the volatility in the currency market. At the same time, these measures will hurt the economic growth too.
The latest measures taken by the RBI have hurt the banking stocks very badly on Wednesday. All the banking stocks, whether it is private sector or public sector, were hammered like anything in the Indian bourses. Yes Bank seemed to have been the worst hit since it had lost over 12 percent at one point of time. Other banks such as IndusInd Bank, Canara Bank, Federal Bank, Axis Bank, ICICI Bank, SBI and HDFC Bank have all lost over 7.5 percent, 6 percent, 8 percent, 6 percent, 4 percent, 3.5 percent and 3.5 percent, respectively, at one point of time during the day trading.
To contact the author, email to rchandrasekaran@americanbazaaronline.com