Banking stocks rise after RBI monetary policy announcement

After the Reserve Bank of India's monetary policy announcements, banking stocks were trading higher as the apex bank’s policy decision came in line with market expectations. The central bank raised the repo rate by 50 basis points (bps) after a 40 bps in an off-cycle policy announcement in May to ease inflationary pressure on the economy.

Reacting to the RBI policy outcome, the BSE Bankex and Bank Nifty indices bounced back in green zone, rising over 1%. The BSE Bankex index was trading 1.06% higher at 40,802, while Bank Nifty index rose 1.09% to 35,376 levels at the time of reporting. In comparision, the BSE benchmark Sensex was trading 58 points lower at 55,048 levels.

In the BSE Bankex space, Bank of Baroda was the best performer with a 2.85% gain, followed by State Bank of India (SBI), which rose 2%. Among others, IndusInd bank, HDFC Bank, Federal Bank climbed over 1%, while Axis Bank, ICICI Bank, and Kotak Mahindra Bank traded higher with around 0.5% gain.

In line with Street estimation, Governor Shaktikanta Das-led six-member monetary policy committee (MPC) of the RBI hiked policy rate (repo rate) by 50 basis points (bps) to 4.9% and also unanimously decided to keep the policy stance withdrawal of accommodation.

“Based on an assessment of the macroeconomic situation and the outlook, the MPC voted unanimously to increase the policy repo rate by 50 basis points to 4.90%, with immediate effect. Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.65%; and the marginal standing facility (MSF) rate and the Bank Rate to 5.15%. The MPC also decided unanimously to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth,” RBI said in a release.

The central bank also retained India's GDP growth projection at 7.2% for FY23, in line with its previous estimates. The RBI noted that inflation is likely to remain in the upper tolerance band in the first three-quarters of FY23, citing that the Russia-Ukraine war impacting global input costs. This is well beyond the RBI's target of 4%, with lower and upper limits of 6% and 2%, respectively. Retail inflation, or Consumer Price Index (CPI), surged to a near 8-year high of 7.79% in April, persisting above the RBI's inflation target of 6% for the fourth straight month.

The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. With inflation not showing immediate signs of abating, the RBI is seen extending its repo hike of June with an increase of 25 bps in August, followed by 25 bps in September.