Banks plunge 2-7% as RBI tightens money supply again

Moneycontrol Bureau

Banking stocks are under pressure in morning trade Wednesday after the Reserve Bank of India (RBI), just ahead of its first quarter monetary policy review on July 30, announced another set of measures to curb the rupee volatility. Country's largest lenders State Bank of India, ICICI Bank and HDFC Bank are down between 2-3 percent while housing finance company HDFC lost nearly 2 percent. The Bank Nifty plunges over 3 percent. Some private sector lenders like Axis Bank, IndusInd Bank, Kotak Mahindra Bank, YES Bank (will announce its Q1 numbers today) and ING Vysya Bank were down 4-7 percent. Meanwhile, public sector lenders namely Bank of Baroda, Bank of India, PNB, Union Bank of India and IDBI Bank slipped 3-4 percent. The central bank restricted the limit of individual bank borrowing to 0.50 percent of its total deposits (or net demand and time liability as it is known in banking parlance) outstanding as on the last Friday of the second preceding fortnight from the RBI's daily borrowing window called Liquidity Adjustment Facility (LAF) in banking parlance. The RBI increased banks' daily minimum need of cash reserve ratio (CRR) to 99 percent from 70 percent currently with effect from July 27. At the same time it scrapped its earlier measure that had limited the total LAF borrowings to the tune of 1 percent of total deposits or Rs 75,000 crore. It was effective from July 17, 2013. Dolat Capital feels the measure to hike daily average CRR requirement is harsh and is akin to a CRR hike. "The obvious aim of the RBI is to suck out liquidity out of the system. Banks will now have to maintain 4 percent CRR all through the fortnight. Assuming that banking industry maintains 70% daily balances, it would mean that Rs 75,000 crore of liquidity being sucked out," Dolat report said. The brokerage house further said, "The other measure of limiting the bank’s borrowings under LAF at 0.5 percent of NDTL would further exert pressure on the short term rates. We expect call rates and bond yields to move up for the short term, and this shall impact the earnings as well as sentiment." Other rate sensitives like Realty and Auto fell 2.4 percent and nearly one percent, respectively.