Indian equity benchmarks turned positive in Friday's trade, recovering from the dip witnessed in early deals. The recovery in domestic indices was majorly supported by banking counters. Top gainers in the 30-share BSE Sensex pack were ICICI Bank Ltd, Axis Bank Ltd and State Bank of India (SBI). Sub-index-wise, Nifty PSU Bank, Nifty Private Bank and Nifty Bank gained up to 1.15 per cent.
The upmove in domestic benchmarks and banking stocks came despite the fact that the Reserve Bank of India (RBI) kept key interest rate unchanged due to "high inflation". The central bank has maintained the key policy repo rate at 6.5 per cent. This is for the 11th consecutive time that the RBI has kept the repo rate unchanged. The RBI has maintained the repo rate at 6.5 per cent since February 2023.
Here are two reasons behind the rise in bank stocks today:
1) CRR rate cut
The Reserve Bank has decided to cut banks' cash reserve ratio by 50 basis points (bps) to 4 per cent, Governor Shaktikanta Das said in his monetary policy address. The cash reserve ratio, or CRR, is the proportion of deposits that banks need to set aside as cash. The cut will be in two tranches of 25 bps each, kicking in on December 14 and December 28. The reduction in CRR would free up Rs 1.16 lakh crore in the banking system, Das underscored.
"As the market anticipated, the CRR rate cut has happened. It is a surprising and encouraging move which will release more liquidity into the system. The RBI wants to balance both inflation as well as growth. But going ahead, we need to see the further RBI commentary on the rate cut," said Kranthi Bathini, Director of Equity Strategy at WealthMills Securities.
"From the market perspective, this is an excellent policy response. Banking stocks will remain resilient," VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services stated.
2) FCNR-B rate
The Reserve Bank also raised the interest rate ceiling for banks for foreign currency non-resident (FCNR-B) deposits, to increase capital inflows in the country. FCNR-B allows non-resident Indians to hold term deposits in India in foreign currencies.
"The RBI has introduced several measures to stabilise the rupee against the US dollar and enhance foreign exchange inflows. These initiatives include relaxing norms for foreign portfolio investments in the debt market, doubling the External Commercial Borrowing (ECB) limit under the automatic route from $750 million to $1.5 billion per financial year, and temporarily removing interest rate caps for banks to attract deposits from non-resident Indians (NRIs). These measures are expected to boost investor confidence and attract greater foreign capital, helping to support the rupee's value. By encouraging NRI deposits and increasing ECB limits, the RBI aims to improve liquidity and strengthen India's financial position in the global market," said Adhil Shetty, CEO of Bankbazaar.com.
Shetty mentioned while the key policy rate is unchanged for the 11th straight time, the stars are aligning for a potential rate cut in February.