Banking stocks tumble as RBI's policy disappoints on liquidity measures

Investors were disappointed as they had anticipated further easing, while analysts warned that liquidity conditions could worsen without new interventions.

The banking pack sulked in trade after the Reserve Bank of India’s latest monetary policy measures did not contain further liquidity easing measures. While the central bank undertook the first rate cut in almost five years, trimming the benchmark lending rate by 25 basis points to 6.25 percent, it failed to bring cheer to the equity markets, which already priced in the development.

In the previous MPC meeting on December 6, 2024, then-RBI Guv Shaktikanta Das announced that the central bank was trimming the CRR or Cash Reserve Ratio by 50 basis points to 4 percent. This is the amount of a bank’s total deposits maintained with the RBI as a reserve. Therefore, banks would have more cash freed up, injecting liquidity into the system.

Following this, the RBI imposed a series of measures to boost liquidity in January, adding Rs 1.5 lakh crore to the system.

Therefore, investors were looking to the Reserve Bank of India for measures beyond the expected quarter-sized cut in the repo rate for the current meeting. Analysts had expected that easing by stealth via unconventional policy tools like liquidity and regulatory measures will continue.

As this was absent in Governor Malhotra’s first ever MPC meeting, investors sold off their holdings in banking stocks. The Bank Nifty index tumbled half a percent at around 12.30 pm, while Bank of Baroda, State Bank of India, and ICICI Bank’s stocks led the losses, falling up to two percent in trade.

However, Madhavi Arora of Emkay Global said, “While market participants are disappointed with no new explicit announcement on liquidity measures, we reckon such announcements do not need to be announced on the MPC policy platform per se and can be undertaken as and when needed.”

The RBI had announced Open Market Operations (OMO) purchase of Rs 60,000 crore as part of its liquidity injection in January, out of which Rs 20,000 crore has already been conducted.

"More OMOs are likely post this, as governor said that RBI is likely to continue to provide durable liquidity to reduce overall systemic liquidity deficit," Avnish Jain, Head – Fixed Income at Canara Robeco Mutual Fund noted.

The remaining liquidity measures announced in January are still to be completely implemented, and the near-term system liquidity deficit, including durable liquidity, appears comfortable compared to January 2025 highs.

As a result of the liquidity boost over the past few weeks, the weighted interbank call rate (which is the interest rate at which banks lend to each other overnight) settled under the repo rate (which is the interest rate at which RBI lends to banks overnight).

A key reason RBI does not want liquidity conditions to be in surplus which may lead to further weakening of the currency.

A cause of the banking pack’s sour sentiment is that the transmission of this rate cut could be delayed, especially through bank loans linked to MCLR (Marginal Cost of Funds-Based Lending Rate).

“It is likely that some of the banks could increase the share of MCLR loans over EBLR (External Benchmark Lending Rate), to preserve margins at a time when deposit mobilisation remains sluggish,” said Debopam Chaudhuri, Chief Economist, Piramal Group.

However, a silver lining emerges. The RBI Governor announced that the implementation of the liquidity coverage ratio (LCR) norms would be delayed to March 31, 2026, the end of FY26.

Given the current liquidity crunch, Moneycontrol has exclusively reported that domestic banks had requested the deferral given the current liquidity status. The norms were due to be imposed on April 1, 2025.

The proposed LCR rules, issued in July 2024, called for banks to assign an additional 5 percent ‘run-off factor’ for retail deposits that are enabled with internet and mobile banking (IMB) facilities.

However, going ahead, the RBI might need to do more to boost liquidity. Emkay Global noted that the system liquidity will turn ugly to the tune of ~Rs2.5 lakh crore by the end of March 2025, without any additional liquidity measures.

Therefore, the markets revert to the wait-and-watch mode, to see what the RBI does going ahead, especially since the tightrope between growth and inflation remains shaky.

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