Banks under pressure on rate hike; markets volatile

• Immense volatility was witnessed on the bourses as the key benchmark indices recovered from lower level soon after hitting fresh five-week lows as the Reserve Bank of India’s (RBI) announced a steep hike of 50 basis points (bsp) in key short term rates to tame high inflation. The Sensex was down 200 points or 1.04% to 18,800.25. The market breadth was just about negative.

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• Banking stocks declined in choppy trade after the central bank raised key short-term interest rates by an aggressive 50 basis points at a policy review today. The central bank also proposed to enhance the provisioning requirements on certain categories of non-performing advances and restructured advances today at the time of announcing the annual policy review.

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• Bank Nifty was down 2.63 percent at 10,987. All the 12 banking counters were in the red ranging from -0.02 percent in case of Kotak Bank to -4,87 percent for Canara Bank. SBI the largest bank was down 3 percent at Rs 2610, while ICICI Bank the second largest bank was down 2 percent at Rs 1076.

• The Reserve Bank of India (RBI) at its annual 2011-2012 monetary policy review today raised repo rate by 50 basis points to 7.25% and the reverse repo rate by 50 basis points to 6.25%. The RBI kept cash reserve ratio unchanged at 6% and increased savings banks deposit rate to 4%.

• The central bank in its annual policy on Tuesday said that over the long run, high inflation is inimical to sustained growth as it harms investment by creating uncertainty.

• The policy aims at maintaining an interest rate environment that moderates inflation and anchors inflation expectations. Second, it targets to foster an environment of price stability that is conducive to sustaining growth in the medium-term, coupled with financial stability. And, thirdly, to manage liquidity to ensure that it remains broadly in balance, with neither a large surplus-diluting monetary transmission nor a large deficit choking off fund flows.