Banks up 2-7% as RBI eases liquidity crunch, cuts MSF rates

Moneycontrol Bureau

Banks stocks are on fire in early trade Tuesday with the BSE Bankex surging more than 3 percent. In a surprise moveReserve Bank of India (RBI) Governor Raghuram Rajan reduced the marginal standing facility (MSF) rate by 50 bps to ease liquidity pressure.

Banks cheered the move as overnight borrowing rate dropped to 9 percent from 9.5 percent. YES Bank and IndusInd Bank gained the most among largecaps, rising 6-7 percent followed by Kotak Mahindra Bank and Axis Bank with 3.5 percent gains.

India's largest lenders State Bank of India, ICICI Bank, HDFC Bank, Punjab National Bank and Bank of Baroda rallied between 2-3 percent.

The MSF cut will ease short-term rates and companies are likely to borrow from the commercial paper (CP) market instead of banks.

Banking secretary Rajiv Takru said the cut in MSF would have positive impact on the economy. He expects banks to reduce lending rates by 0.25-2.5 percent.

The move is part of the calibrated withdrawal of exceptional measures undertaken by the Reserve Bank and is aimed at improving liquidity in the system. The RBI's 200 bps increase in the MSF rate in July had tightened short-term market liquidity.

In its mid-quarter review of September 2013, the RBI had cut MSF by 75 basis points from 10.25 percent to 9.5 percent.

Meanwhile, it has been decided that the central bank will provide additional liquidity through term repos of 7-day and 14-day tenor for a notified amount equivalent to 0.25 percent of net demand and time liabilities (NDTL) of the banking system through variable rate auctions every Friday beginning October 11, 2013. The notified amount and tenor of the term repo auctions will be announced prior to the dates of the auctions.