INDIA BUSINESS WORLD - FEBRUARY 2007
The Month that was ...

RBI'S PROVISIONING CALL PUTS BANK STOCKS ON THE BRINK

BANK shares ended mixed in a weak broader market after the Reserve Bank of India (RBI) surprised markets by raising only the repo rate, while keeping the reverse repo rate unchanged. The hike in repo rate, which is at a 4-year high, is part of the central bank's attempt to slow credit growth and cool inflationary pressures. Analysts had expected hike in both repo and reverse repo rates.

The real dampener for investors came in the form of increase in banks' provisioning requirements for lending in select real estate, capital market, personal loans and credit cards to 2% from 1%, aimed at slowing credit offtake to these segments.

News of hike in provisioning requirements for the capital market resulted in key indices falling close to 1%. BSE Sensex declined 121.04 points or 0.85% to 14090.92, while BSE's banking index Bankex fell 32.69 points or 0.45% to 7292.78. Among notable laggards in the sector, ICICI Bank, State Bank of India, Bank of India and Canara Bank fell 1-2%. Gainers included UTI Bank (up 6%), Andhra Bank (up 2.9%) and HDFC Bank (up 1.8%). Analysts said the impact of the increase in provisioning requirements would be more visible on private sector banks due to higher exposure to the retail segment. "This hike in provisioning requirement will erode roughly 6-7% of the earnings of private sector banks this year," said Kashyap Jhaveri, analyst, Emkay Shares & Stockbrokers, adding that the repo rate rate would have minimal impact on banks.

The central bank hiked the repo rate by 25 basis points to 7.50%, while the reverse repo rate was left untouched at 6%.

The central bank had hiked both repo and reverse repo rates by 25 basis points in October. Analysts said the repo rate hike is a reminder to banks to manage their liquidity position carefully, at a time when credit offtake is growing at 30%, while deposit base only at 20%. The jump in inflation to 6% recently was also above RBI's target of 5-5.5%. The repo rate hike follows a surprise hike in cash reserve ratio the amount banks need to hold with RBI in cash in December.

The move had mopped up Rs 13,500 crore from the banking system.

These measures have resulted in rise in banks' lending rates, which along with the recent cut in import duty on select items, are expected to contain inflation.