Short-covering, expectation of rise in yield on advances behind spike.
Shares of banks were top gainers today on short-covering and possibility of better yields on advances after the Reserve Bank of India (RBI) raised the cash reserve ratio (CRR), the reserve banks have to mandatorily keep with RBI.
The Bombay Stock Exchange (BSE) Bankex was the best performer of the day.
“The CRR hike will not have a material impact as there is surplus liquidity. In fact, short-term rates will rise and banks will be able to clock better yields on advances and maintain margins,” said PS Subramaniam, research analyst, SBICAP Securities.
The hike in CRR means banks will have to park more funds with the central bank. This money does not earn interest.
The repo rate (at which banks borrow from RBI) and the reverse repo rate (at which RBI borrows from banks) were left unchanged at 4.75 per cent and 3.25 per cent, respectively.
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Morgan Stanley said “the negative impact of these rate hikes should be materially lower this time around”.
The Bankex gained 3 per cent, or 280.33 points, to close the day at 9,654.09, outpacing the Sensex, which gained 51.09 points, or 0.31 per cent, to close at 16,357.96.
UCO Bank, Canara Bank, IDBI Bank, ICICI Bank and Oriental Bank of Commerce were some top gainers in the A group of stocks on the BSE, gaining 5-8 per cent.
SBI clocked the highest volumes on the BSE, followed by ICICI Bank. Volumes in the two were in excess of Rs 200 crore each.
Dealers tracking banking counters said huge short positions were being built in the sector ahead of the policy and most of these were squared off after today’s announcements.
“The adage, ‘buy on rumour and sell on news’, was evident today,” said Samir Prasad, vice-president, Centrum Stock Broking. “On Friday, even as the broader market was in the red, banking stocks remained marginally positive due to short-covering.”
In fact, in December, mutual funds invested the largest share of their investments in the banking sector, said Prasad.
This is corroborated by the fact that the Bankex has been untouched by the overall negative sentiment that has recently gripped stock markets. The Sensex has lost nearly 3 per cent, or over 500 points, in the last one week, while the banking index has been down only 156 points, or 1.59 per cent.
Interestingly, Morgan Stanley said it would be “buyers on dips”, as it believes that a “gradual rise in rates will be good for earnings progression as it will support margin expansion for Indian banks”.
Krinal Shah of Anagram Capital said, “Banks will definitely have an opportunity loss of interest income, but it is negligible and depends upon liquidity conditions of individual banks.”