Financial stocks feel the pinch of RBI loan stance; Sensex falls 188 points

Sensex, Nifty decline intraday but finish with gains for a third week in a row

Benchmark indices ended Friday’s session lower amid a weakness in finance stocks after the Reserve Bank of India (RBI) asked banks to set aside more capital while extending unsecured loans.

The Sensex declined by 188 points, or 0.3 per cent, to end the session at 65,795. The Nifty 50 index fell by 33 points, or 0.2 per cent, to end the day at 19,732. Despite Friday’s losses, the Sensex and Nifty finished with gains of 1.4 and 1.6 per cent for the week, respectively — their third consecutive weekly gain.

Banking stocks contributed the most to the Sensex’s decline. ICICI Bank, which fell by 1.5 per cent, was the biggest drag on the Sensex, followed by Axis Bank, which declined by 3.03 per cent. The Bank Nifty index fell by 1.3 per cent, while State Bank of India (SBI) fell the most at 3.7 per cent. The Nifty Financial Services index also fell by nearly a per cent, where SBI Cards and Payment Services was the top loser, tumbling by 5 per cent. Financial stocks account for nearly 40 per cent of the weightage in the benchmark indices.

In a circular on Thursday, the RBI said risk weights on consumer credit would be raised. The central bank’s decision follows RBI Governor Shaktikanta Das’ warning to lenders in October to look carefully at their risk strategies amid a rapid growth in unsecured loans. 

Analysts said the RBI’s move would slow loan growth and increase funding costs and capital requirements.

In a note, Nomura said the move would negatively impact loan growth for non-banking finance companies (NBFCs) in financial year 2024-25 (FY25), given that between 25 and 30 per cent of their incremental loan growth during FY22-24 came from unsecured loans. However, some market experts said the impact of the RBI’s decision on banks would be minimal.

“The immediate impact of the RBI action to increase the risk weight on certain categories of unsecured loans, loans to NBFCs, and credit card loans is this will increase the capital requirements of banks, which, in turn, will raise their cost of capital. The impact on banks’ profitability will be negligible,” said V K Vijayakumar, chief investment strategist at Geojit Financial Services.

Equity markets have been rising over the past few weeks as soft inflation data in the US and the UK fueled the conviction that aggressive policy-tightening cycles from the Federal Reserve and other central banks are finally ending.

After two days of buying, foreign portfolio investors (FPIs) turned net sellers to the tune of nearly Rs 500 crore. Domestic institutions yanked out Rs 565 crore from domestic stocks. Market breadth was mixed, with 1,926 stocks advancing and 1,823 declining.

Most global markets extended gains on Friday as investors hoped softer inflation readings would put an end to the rate-hike cycle by the Fed, with some even betting on a 50-basis point cut by July next year.

On Thursday, Morgan Stanley set a December 2024 target of 74,000 for the benchmark Sensex, implying about a 12 per cent increase from current levels. 

“With strong earnings, macro stability, and domestic flows, it is hard to argue against India's investment case. That said, an event-heavy calendar with potential binary outcomes sets the market up for volatility, after having been less volatile than ever,” strategists Ridham Desai, Sheela Rathi, and Nayant Parekh wrote in a note.