The Reserve Bank of India (RBI) move fuels rally on Dalal Street; ICICI Bank, SBI up over 2%

New Delhi –  The S&P BSE Banking index rose a little over 3 per cent in morning trade on Tuesday, after the Reserve Bank of India (RBI) reduced the rate under the marginal standing facility (MSF) by 50 basis points to 9% to ease liquidity.

The measures are an unwinding of the liquidity tightening that began in July to fight a currency slide that took the rupee to a record low of 68.84 to the US dollar.

“As an immediate impact of these measures, short-term interest rates are likely to reduce proportionately and the measures are positive for more wholesale funded banks,” Angel Broking said in a note.

“These measures are likely to result in further decline in their costs of funds by roughly 5-10bp on an annualized basis (the reduction in cost across banks would be in congruence with its dependence on wholesale funds),” added the note.

At 09:20 a.m.; the S&P BSE Banking index was the top gainer among the sectoral indices on the Bombay Stock Exchange. Both private and public sector banks were trading with strong momentum.

ICICI Bank, HDFC Bank, Yes Bank, Axis Bank and HDFC were top gainers among the private sector names. While the SBI Punjab National Bank was leading the charge in the PSU space.

Bank Nifty rose over 300 points or over 3 per cent at 10,382. The BSE Banking index was trading 2.9 per cent higher or 337 points at 11813 as compared to 200-point rally in the benchmark index, the Sensex.

ICICI Bank was the top gainer on the 30-share BSE Sensex. The stock rallied nearly 4 per cent to touch its intraday high of Rs 951.10. HDFC Bank and HDFC were trading 2 per cent and 1.2 per cent respectively.

Axis Bank, Federal Bank, Yes Bank and IndusInd Bank were trading 4-8 per cent higher. IndusInd Bank was the top gainer in the BSE Banking index, up 8.3 per cent to Rs 429.

In the PSU space, Punjab national Bank was trading 4.2 per cent higher at Rs 487, followed by Canara Bank which was up 4.1 per cent, Bank of Baroda rose 3.7 per cent and State Bank of India was up 2.4 per cent to Rs 1,672.

Post the RBI move, brokerages are of the view that it is the step in right direction buts margins are still likely to remain under pressure especially for non-mortgage lenders.

“We emphasize that this is a step towards normalization of exceptional liquidity conditions, and shouldn’t be construed as any change in policy stance,” Citigroup said in a note. We continue to expect RBI to hike the repo rate by 25-50bps and reduce the MSF rate by 0-25bps in the remainder of 2HFY14, added the note.

The RBI move reinforces view from most brokerage firms that the rate cycle has peaked. However, the stress for wholesale funded entities, while reduced, has still not gone away.

Global investment bank, JPMorgan is of the view that margins are likely to remain under pressure, especially for non-mortgage lenders. We maintain that the rate cycle has seen its worst but the lengthy period of inverted rates could see the pain persist.

“The best way to play the rate cut, we believe, is through Yes Bank and IDFC – primarily because of valuation support. While not a direct beneficiary of rate cuts, our top picks in the sector are ICICI and Axis,” added the report.