50bps rate cut & 100 bps CRR cut is positive for bank stocks

Mumbai, June 08

The RBI has clearly frontloaded its policy actions with a 50 bps repo rate cut, a 100 bps CRR cut, and a shift in policy stance to Neutral. The RBI move has seen banks’ stocks going up.

This aggressive move raises the question: Have we reached the terminal repo rate? While it’s too early to confirm, the magnitude of easing suggests we may not see further rate cuts in the near term.

The CRR cut, being a powerful liquidity tool, is a significant positive for banks. No wonder banks stocks are moving up. It will free up lendable resources and is expected to support credit growth. However, this also brings into focus whether the RBI will now scale down its daily VRR operations or pause OMO purchases, given the enhanced systemic liquidity.

Talking to Bizz Buzz, Venkatakrishnan Srinivasan of Rockfort Fincap says, “Despite the monetary easing, G-sec yields haven’t moved significantly—likely because markets are now waiting to see how banks deploy this liquidity. If banks begin channeling funds into mutual funds instead of lending, we could see a softening in corporate bond yields, particularly in the AAA space.”

This is a welcome breather for debt mutual funds, hybrid funds, and liquid funds, which may benefit from the stabilizing interest rate environment and improved liquidity, he said.

However, FPIs are likely to remain cautious on Indian G-Secs and AAA-rated instruments, given the compressed yields and global interest rate uncertainties, he added.

A section of people, however, believe that the higher-than-expected 50bp rate cut decision by the MPC, though positive for growth is slightly negative from the market perspective for the near-term.

VK Vijayakumar, Chief Investment Strategist, Geojit Investments says, “This big rate cut is, as the RBI Governor remarked, front-loading of the rate cut. The change in monetary stance from accommodative to neutral also indicates that more rate cuts are unlikely unless the situation warrants.”

This big rate cut will impact the margins of the banks and, therefore, bank stocks will be under pressure in the near-term. However, the credit growth that this rate cut will hopefully stimulate will compensate for the dip in margins.

The announcement of CRR rate by 1 per cent is further illustrative of the seriousness of RBI to boost credit growth by providing adequate availability of funds with banks with expected release of 2.5 lac crore.

EoM.