CRR hike may pull down bank stocks

FEBRUARY 14, 2007: Marketmen fear panic selling in the stock market on Wednesday following the Reserve Bank of India’s decision to raise cash reserve ratio (CRR) by 0.5% in two stages to tame the mounting inflation in the economy. The move, aimed at sucking out excess liquidity from the banking system, will be effective from February 17 and March 3, respectively with 0.25% hike in each stage. Concerns over inflation and hardening of interest rates have knocked off 560 points off the benchmark 30-share Sensex in the past three sessions.

“The sudden CRR hike is definitely going to have some negative impact on the market,” says Priyadarshi Srivastava, research head at Niche Securities. “With a likely rise in PLRs, home loan rates could become dearer, affecting the real estate sector,” he adds. He also said the move could hinder corporate borrowings and affect credit offtake of the banking sector.

Banking stocks are expected to take a pounding as the RBI move will limit their ability to lend. When the RBI had announced a similar hike in the first week of December 2006, bank stocks had borne the brunt of the selling pressure. This was also due to the fact that foreign funds, unable to buy directly into banking stocks because of the FII investment ceiling, had taken exposure to the sector through exchange traded funds in the preceding months. When panic set in, everyone rushed to redeem their holdings at the same time, sending stock prices into a tailspin.

A small cause for comfort this time is funds seem to have already withdrawn from these stocks, fearing such a move from the RBI. The corpus of Bank BeES, an exchange traded fund, stood at Rs 5,633 crore as on January end, compared with over Rs 7,500 crore as on end November 2006. Sanjay Sinha, head of equities at SBI Mutual Fund, feels banking stocks are likely to bear the brunt of the initial knee jerk reaction when the market opens for trading on Wednesday.

“But one must also remember that there could be some positive triggers in the near future, a SLR cut for instance, which would surely boost the banking stocks,” Mr Sinha says.

RBI expects to suck out Rs 14,000 crore excess liquidity from the system by raising CRR.

Latest data shows inflation at 6.58%, its highest level in over two years, is giving sleepless nights to finance ministry and RBI officials who have to ensure that inflation control measures do not end up hurting economic growth.

CRR is the portion (expressed as a per cent) of depositors’ balances that banks must have on hand as cash. By changing the CRR, the central bank can change the money supply in a country. Hiking the CRR would suck money from the system, which in turn would lead to further interest rate hikes thus pushing up borrowing costs of corporates.

Source: economictimes