The rate sensitive sector stocks - banking, real estate and automobiles -- have been volatile on the bourses after the Reserve Bank of India (RBI) increased the repo rate and reverse repo rate under the liquidity adjustment facility (LAF) by 25 basis points each with immediate effect in its third quarter review of monetary policy 2010-11. In a knee-jerk reaction, the banking stocks had flared up in the aftermath of the policy announcement, but slipped immediately thereafter on the realisation that the banking authority has been behind the curve this time around as far as tackling inflation is concerned.
The RBI increased the repo rate to 6.5% from 6.25% and reverse repo rate to 5.5% from 5.25% earlier. Repo rate is the rate at which banks borrow from the RBI and reverse repo rate is the rate at which the central bank borrows money from banks.
The central bank has retained the cash reserve ratio (CRR) at 6% of net demand and time liabilities (NDTL) and the bank rate has been retained at 6%.
On liquidity measures, RBI has increased the additional liquidity support to scheduled commercial banks under the LAF to 1% of their NDTL and extended the timeline till April 8, 2011 from the current January 28, 2011. For any shortfall in maintenance of the SLR arising out of availment of this facility, banks may seek waiver of penal interest purely as an ad hoc measure.
These actions are expected to contain the spill-over from rise in food and fuel prices to generalized inflation, rein in rising inflationary expectations, which may be aggravated by the structural and transitory nature of food price increase and continue to provide comfort to banks in their liquidity management operations, the central bank said in its statement.
Among the individual stocks – ICICI Bank, HDFC Bank and State Bank of India (SBI) from banking, and Tata Motors from the auto space have slipped into the red, while Heo Honda, Bajaj Auto and DLF are trading on the higher side.
The next mid-quarter review of Monetary Policy for 2010-11 will be announced on March 17, 2011 and the Monetary Policy for 2011-12 will be announced on May 3, 2011.
