Bank Nifty hits 10-month low as RBI tightens liquidity: What experts said

The Bank Nifty today hit a 10-month low after the Reserve Bank of India (RBI) announced fresh measures to drain cash, making access to short-term funds harder.

The NSE banking index was down 3.25 percent.

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All banking shares were down as theRBI has reduced the liquidity adjustment facility (LAF) for each bank from 1 percent of the total deposits to 0.5 percent, thus limiting the access to borrowed funds from the central bank. The limit will come into force with immediate effect and continue until further notice.

In another measure to suck out liquidity from the system, RBI has asked banks to maintain higher average CRR (cash reserve ratio) of 99 percent of the requirement on daily basis as against the earlier 70 per cent. CRR is portion of deposits that banks are required to keep with RBI.

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Yes Bank dropped 5.81 percent, while IndusInd Bank fell 6.76 percent.

Country’s largest lenders State Bank of India , ICICI Bank and HDFC Bank were down between 2-3 percent while housing finance company HDFC lost nearly 2 percent. Public sector lenders namely Bank of Baroda , Bank of India , PNB , Union Bank of India and IDBI Bank slipped 3-4 percent.

According to Bank of America Merrill Lynch the RBI move could lead to a further short-term correction in selected banks stocks as the market is likely to interpret this as a “pseudo” cash reserve ratio (CRR) hike and likely precursor to lending rate hikes that should further hurt growth / asset quality.

Religare too believes that wholesale-funding would get incrementally expensive which is negative for Yes Bank , IndusInd , OBC and that implications for growth would remain an overhang on the entire banking/NBFC space.

“The measure to hike daily average CRR requirement is harsh and is akin to a CRR hike, in our opinion. The obvious aim of the RBI is to suck out liquidity out of the system. Banks will now have to maintain 4 per cent CRR all through the fortnight. Assuming that banking industry maintains 70 per cent daily balances, it would mean that Rs 75,000 crore of liquidity being sucked out,” said areport byDolat Capital Market.

According to Chetan Ahya of Morgan Stanley the three key factors that will influence the domestic interest rate environment are CPI inflation, the current account deficit (CAD), and the external funding environment.

“Over the next six months, as macro stability indicators (CPI inflation and CAD) remain somewhat elevated, short-term interest rates will remain extremely volatile within the 300bps band between repo and marginal standing facility rate. They are likely to be highly influenced by the trend in US real rates and US Dollar. As macro stability indicators gradually improve towards the comfort zone, this will likely reduce the volatility in the interest rate environmen,” said Ahya.