Bank stocks tank after RBI hikes repo rate to 7.5%

BSE Bankex fell 4.18% to 12,166.86

Bank stocks tank after RBI hikes repo rate to 7.5%

Bank shares on Friday fell sharply after the Reserve Bank of India (RBI) raised its key policy lending rate by 25 basis points to 7.5 per cent in its monetary policy review.

Later, they recovered their intraday losses as the RBI simultaneously decided to start unwinding of the exceptional measures it had taken since mid-July to tighten liquidity with a view to dampen volatility in the foreign exchange market and after RBI Governor Raghuram Rajan said that the marginal standing facility (MSF) rate is the effective policy rate. The MSF rate, at which banks borrow from the central bank, was reduced by 75 basis points to 9.5 per cent.

In all, 14 bank shares fell by 1.63 to 7.90 per cent on BSE trimming intraday losses after the new RBI governor Raghuram Rajan said the hike in key interest rates cannot be immediately viewed as negative for growth.

Yes Bank fell 7.90 per cent to Rs 356.25, while ICICI Bank fell 4.78 per cent to Rs 987.30 and HDFC Bank fell 3.63 per cent to Rs 659.05. Among PSU lenders, State Bank of India fell 3.44 per cent to Rs 1746.55, while others like Union Bank of India (down 7.89 per cent) and Punjab National Bank (down 7.31 per cent) edged lower.

The BSE Bankex fell 4.18 per cent at 12,166.86, which underperformed the bellwether index of BSE (Sensex), which was down 1.85 per cent at 20,263.71 points in the closing this day.  The BSE Bankex fell 6.67 per cent at the day's low in mid-afternoon trade and rose 0.34 per cent at the day's high in early trade.

The plunge in banking shares was triggered by Rajan's statement early on Friday that the calibrated withdrawal of exceptional measures that RBI had taken since mid-July to tighten liquidity to dampen volatility in the foreign exchange market will provide a boost to growth, reduce the financing distortions that are emerging in the market and reduce the strain on corporate and bank balance sheets.

Repo rate is the rate at which RBI lends money to banks, which is generally of short-term in nature. WPI inflation has started rising again as the pass-through of fuel price increases has been compounded by the sharp  depreciation of the rupee and rising international commodity prices.

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