RBI Policy Impact: Financials gain, PSU Bank index rises 2% on CRR cut

Financials were trading higher by up to 2 per cent on the National Stock Exchange (NSE) in Friday’s intra-day trade after the Reserve Bank of India’s Monetary Policy Committee (RBI MPC) today announced its decision to cut Cash Reserve Ratio (CRR) by 50 basis points to 4 per cent. The CRR is the percentage of a bank's total deposits that it is required to maintain in liquid cash with the RBI as a reserve.

 

A 50-bps cut in CRR would infuse liquidity of Rs 1.16 trillion in the banking system which will aid lenders in current scenario with constraints of liabilities accretion. Thus, cut in CRR is positive for lenders.

 

 

At 10:45 am; the Nifty PSU Bank index was the top gainer among sectoral indices, up nearly 2 per cent, as compared to 0.06 per cent rise in the Nifty 50. Nifty Bank, Nifty Private Bank and Auto indices were up 0.4 per cent, while the Nifty Realty index was down marginally.

 

Uco Bank, Indian Overseas Bank, Central Bank of India, Bank of Baroda, Canara Bank and Union Bank were up in the range of 2 per cent to 2.5 per cent. State Bank of India (SBI), Bank of India and Punjab National Bank were up 1 per cent.

 

Liquidity measures like the CRR cut will provide a lifeline for banks to drive lending. Banks, non-banking financial companies (NBFCs), real estate, auto, consumer durables, and infrastructure sectors stand to gain directly from the RBI’s accommodative measures and liquidity infusion.

 

Meanwhile, the RBI MPC has maintained the repo rate at 6.5 per cent since February 2023. Despite calls for a rate cut, the central bank is focused on balancing inflation control with economic growth.  The MPC also decided to continue with the neutral monetary policy stance and to remain unambiguously focused on a durable alignment of inflation with the target, while supporting growth.

 

As widely expected, RBI has held its policy rate at 6.5 per cent, while announcing a CRR cut of 50 bps in two tranches of 25 bps each over the next two fortnights. By doing this, the RBI has provided adequate liquidity and eased the short term borrowing, while keeping longer term well anchored. Alongside the growth outlook of 7.2 per cent for FY25 has been taken down to 6.6 per cent, with the recent slowdown in growth. Inflation outlook has however been revised upwards to 4.8 per cent for FY25 from 4.5 per cent with 4 per cent reaching in Q2 of FY26, said Anitha Rangan, Economist at Equirus.

 

“CRR reduction by 50 bps should improve liquidity during the busy season, which should help with working capital management. The MSME sector would greatly benefit from a benign interest rate regime and have much more incentive to upgrade and modernise operations, leading to a significant competitive advantage”, said K V Srinivasan, Director and CEO at Profectus Capital.

 

The RBI has maintained status quo, clearly expressing its discomfort on inflation levels. With GDP growth rates moderating and with private sector capital expenditure yet to pick up, perhaps they would signal soft interest rates sometime in the near future, said K V Srinivasan.

 

"Monetary policy has delivered exactly what the economy and markets need in the present context. The Governor’s emphasis on price stability is appropriate given the elevated level of inflation. The decision to cut the CRR by 50bp facilitating injection of Rs 1.16 trillion of liquidity into the system will ease the liquidity constraints and more importantly reduce the banks’ cost of funds. From the market perspective, this is an excellent policy response. Banking stocks will remain resilient,” said Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.