Money on the markets
A maturing market amid the mayhem
from India Insight:
The Reserve Bank of India (RBI) on Tuesday cut the repo rate as well as the cash reserve ratio (CRR) by 25 basis points, or 0.25 percent. Here's a quick explanation of what that means. It will be obvious to some readers, but many people haven't studied economics and are unfamiliar with the terms.
The repo rate, which now stands at 7.75 percent, is the rate at which the central bank lends money to Indian banks. As the repo rate goes down, it gets cheaper for banks to borrow money. That makes it easier for people to borrow money at cheaper rates too. As more people borrow money, which ought to be the result of action like this, they'll spend more money. That's good for the Indian economy.
The CRR, meanwhile, is the amount of funds banks must keep with the RBI. The CRR is at 4 percent, which means for every 100 rupees, the bank keeps 4 rupees with the RBI in cash. The ratio indicates the policy stance of the bank and is used as a tool to manage liquidity, or the amount of money in the system. By changing this ratio, the central bank can control the amount of liquidity. Tuesday's cut would release 180 billion rupees (or about $3.35 billion) into the system, meaning banks would have more money to lend to borrowers.
Cutting the repo rate doesn't always cut lending rates, of course. Banks might worry that lower lending rates could hurt their profits. However, IDBI Bank cut its base rate after the RBI announcement, and the head of India’s top lender, State Bank of India, said banks likely will cut lending rates.
It was a good trading session for banking counters, with the BSE banking index gaining more than 2 percent and ending as the top sectoral gainer, as fund managers bet the sector would benefit from a booming domestic economy.
Shares in Bank of India gained 5.4 percent to end as the top Bankex gainer, followed by IDBI which gained 4.3 percent.
The BSE Banking Index outperformed other indices on Tuesday, gaining nearly 1 pct in a flat Mumbai market, with stocks like Bank of Baroda and IDBI posting good gains.
Optimism over loan demand in a growing economy is helping banking stocks, but rising interest rates is a concern as this could push up costs for manufacturers and tighten their margins.
India’s benchmark stock index did reasonably well in the first half of 2010 as compared to its emerging market peers. The Sensex gained 1.4 percent during the period, and outperformed China’s Shanghai Composite Index and Brazil’s Bovespa which declined 9.6 percent and 26.8 percent respectively.
Shares in Reliance Industries, India’s top listed firm which has the heaviest weight in the index, barely changed during the period, but a Supreme Court ruling on a gas dispute and Ambani brothers reconciliation kept the company in focus.
Various banking stocks were under pressure on Monday on concerns the Reserve Bank of India (RBI) would further hike interest rates.
The Bankex closed down 0.84 percent with 12 of 17 components in red.
Allahabad Bank and Bank of Baroda were the worst performers in the index, losing over 3 percent. Bigger players like ICICI Bank dropped 1.2 percent while SBI slipped 0.7 percent in trade.
BSE Banking Index ended 1.16 percent higher on Tuesday powered by gains in India’s top private lender, ICICI Bank which contributed most of the rise.
Shares in ICICI Bank, (up 1.9 percent), SBI, (up 0.9 percent), Yes Bank, (up 4.3 percent), Kotak Mahindra Bank, (up 2.04 percent) and Axis Bank, (up 1.34 percent).
The BSE Sensex posts its first weekly gain in three weeks helped by India’s top lender SBI and Sensex heavyweight ICICI Bank.
Shares in SBI ended 3 percent higher at 2204 rupees posting its biggest rise in three weeks, while ICICI Bank which holds over 7 percent weightage in the 30-share Sensitive index ended 0.48 percent to 848 rupees.
The BSE Banking Index ended 1.7 percent higher on Friday while for the year it has gained over 70 percent.
The RBI on Tuesday asked banks to increase the minimum provision ratio for bad debts to 70 percent from 10 percent by September 2010.
Leading the pack was Indian Overseas Bank which jumped over 7 percent, and Federal Bank which gained 3.1 percent. Bigger peers like SBI and ICICI ended the day in the red.