Bank stocks saw a revival of sorts as the central bank yesterday announced steps to ease liquidity conditions. The BSE Bankex rose 2.55 per cent, the most among sectoral indices.
Concerns over the heating of the money market and the subsequent depreciation of the bond portfolio were eased, said market players.
Said Arvind Sampath, director and head, bond trading, Standard Chartered Bank, “This is definitely a comforting move for the money markets. This is in line with the Reserve Bank of India’s (RBI’s) intention to provide sufficient liquidity in the system.”
RBI yesterday announced a cut of half a percentage point in the statutory liquidity ratio and made overnight loans available twice a day through its liquidity adjustment facility. Earlier, these loans were available only once a day, except for reporting Fridays. These are valid till July 2.
Overall, the move is expected to infuse Rs 20,000 crore into the system and ease the liquidity pressure that was building up after payments for 3G mobile spectrum threatened to suck out Rs 68,000 crore from the system. The yields on 10-year government bonds rose to a two-week high on Wednesday to 7.53 per cent. Sampath adds, “With this move, I do not see yields rising above the 8 per cent mark, in the short term at least.”
Bank stocks had been facing incessant selling pressure as higher yields would have meant a depreciation in the bond portfolio, for which banks would have to make mark-to-market provisions (revising the value of securities in line with the current values). The BSE Bankex fell 4.79 per cent over the month due to strong selling pressure.
Motilal Oswal, chairman, Motilal Oswal Securities, says, “The pressure on banking stocks will ease now.”
Top gainers in the sector on Thursday were Axis Bank, which gained five per cent, and Indusind Bank and Bank of Baroda, which rose over four per cent. Fund managers said banking sector stocks had run up a bit and started to look over-valued. But, with the correction, value has started emerging. “There are still many undervalued banks and I am bullish on the sector,” says Oswal.
State Bank of India gained two per cent on news it had applied for an extension of the new provisioning coverage ratio (PCR) norm till September 2011. The PCR norms of the central bank, if adhered to, would have seen the bank take a hit on profitability. “If accepted, the move is expected to delay the process and allow the bank to ease the erosion in earnings,” said a manager with a leading mutual fund house.
