Bank stocks melt on RBI's redoubled war against inflation

Bears are attacking banking shares with renewed vigour after the Reserve Bank of India's decision to hike repo rates. The Bank Nifty is down 398.95 points with stocks like ICICI Bank, SBI, Punjab National Bank, Axis Bank and Bank of India down 4-6 percent.

With new governor Raghuram Rajan backing his war on inflation with a 25 basis point hike in the benchmark repo rate, market is worried about more hikes to follow. That is because they do not see inflation—retail and wholesale-- receding anytime soon, given the supply side issues. Brokerage house Credit Suisse sees at least two more repo rate hikes by March 2014.

An increase in the cost of funds spells bad news for banks at a time when credit demand is already weak.

And there could be additional trouble by way of existing clients struggling to repay loans, thus adding to the pile of bad loans.

In fact, Axis Bank told CNBC TV18 today that cost of funds will marginally trend higher due to repo rate hikes, thereby exerting minor pressure on margins. For Axis Bank particularly, margins continue to be healthy, but one can expect the base rates to be hiked in the industry thereby slowing down credit growth.   

(Posted by Sonia Shenoy)