RBI review: 5 reasons why banking stocks have fallen

Banking stocks were the worst hit after the Reserve Bank decided to hold key rates citing inflationary pressure. The Bank Nifty, tracked widely by technical analysts, slipped below the key 10,000 mark.

The BSE Bankex was down 2.5 per cent against a 1 per cent fall in the broader Sensex. All 14 banking stocks traded lower on the Bankex.

Here are the reasons for the sharp fall in banking stocks.

1) Banking stocks had witnessed sharp gains ahead of the RBI policy announcement on hopes of a rate cut. The bank Nifty gained 6 per cent over the last month, as compared to the broader Nifty index, which had risen nearly 4 per cent.

2) Loans to remain costly: New loans would have become cheaper had the RBI cut rates. That would have translated into higher credit off take and consequently more business for banks.
3) Cost of funds will remain high: Bank deposits have been growing at 13-14 per cent against 17-18 per cent last year. This has prevented banks to cut deposit rates, which means cost of funds, remain at elevated levels.

4) Tight liquidity: Banks say the liquidity crunch has prevented them from passing the benefits of previous rate cuts to customers. SBI chairman Pratip Chaudhuri had earlier said the liquidity situation was not comfortable forcing banks to borrow three-month money at 9.5 per cent.

5) Sentiment hit: The RBI guidance continues to prioritize inflation against growth. This means there is no guarantee that the central bank would cut rates in the next review.

"While growth in 2011-12 has moderated significantly, headline inflation remains above levels consistent with sustainable growth. Importantly, retail inflation is also on an uptrend," the central bank said in its mid-quarterly review today.

Banking stocks were the worst hit after the Reserve Bank decided to hold key rates citing inflationary pressure. The Bank Nifty, tracked widely by technical analysts, slipped below the key 10,000 mark.

The BSE Bankex was down 2.5 per cent against a 1 per cent fall in the broader Sensex. All 14 banking stocks traded lower on the Bankex.

Here are the reasons for the sharp fall in banking stocks.

1) Banking stocks had witnessed sharp gains ahead of the RBI policy announcement on hopes of a rate cut. The bank Nifty gained 6 per cent over the last month, as compared to the broader Nifty index, which had risen nearly 4 per cent.

2) Loans to remain costly: New loans would have become cheaper had the RBI cut rates. That would have translated into higher credit off take and consequently more business for banks.
3) Cost of funds will remain high: Bank deposits have been growing at 13-14 per cent against 17-18 per cent last year. This has prevented banks to cut deposit rates, which means cost of funds, remain at elevated levels.

4) Tight liquidity: Banks say the liquidity crunch has prevented them from passing the benefits of previous rate cuts to customers. SBI chairman Pratip Chaudhuri had earlier said the liquidity situation was not comfortable forcing banks to borrow three-month money at 9.5 per cent.

5) Sentiment hit: The RBI guidance continues to prioritize inflation against growth. This means there is no guarantee that the central bank would cut rates in the next review.

"While growth in 2011-12 has moderated significantly, headline inflation remains above levels consistent with sustainable growth. Importantly, retail inflation is also on an uptrend," the central bank said in its mid-quarterly review today.