Bank stocks likely to surge after RBI cuts MSF rate, eases liquidity

The BSE Sensex and the broader Nifty are likely to open strongly on Tuesday, a day after the Reserve Bank of India cut the marginal standing facility (MSF) rate by 50 basis points to 9 per cent.

Nifty futures on the Singapore Exchange traded 0.85 per cent higher at 5,983 as of 08.20 a.m. The spot Nifty had closed down 1 point at 5,906 on Monday, while the Sensex ended 21 points lower at 5,906.

The central bank also said that it will provide additional liquidity through term repos of 7-day and 14-day tenors for a notified amount equivalent to 0.25 per cent of net demand and time liabilities (NDTL) through variable rate auctions to take place every Friday from 11 October 2013.

These measures will lower the overnight rate further and help ease liquidity conditions, global brokerage Nomura said.

Banking stocks, which have been under tremendous pressure since the central bank raised repo rate last September, are likely to lead the gains. Private sector lenders such as Yes Bank and IndusInd Bank, who have greater reliance on bulk deposits, are likely to witness sharp gains.

The RBI had jacked-up the MSF rate by 200 basis points in mid-July, the most dramatic move in a package of measures to defend the rupee, which had made the MSF India's de facto policy rate.

With the rupee stabilising, these emergency measures are being withdrawn. The rupee has strengthened 11.4 per cent to 61.79 per dollar after hitting an all-time low of 68.85 to the dollar on August 28.

In his first monetary policy review last month, new RBI governor Raghuram Rajan cut the MSF rate by 75 basis points even as he unexpectedly raised the policy repo rate by 25 basis points to 7.50 per cent and said he wanted the repo rate to regain its role as the policy rate.

Normally, the MSF rate is 100 basis points higher than the repo rate. Monday's move narrowed the gap to 150 basis points.


(With inputs from Reuters)