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Five factors that may impact banking stocks ahead of RBI monetary policy

As the RBI policy approaches, focus shifts to rate sensitive banking stocks, which are trading marginally higher in Monday's trade with Bank Nifty gaining 0.28 per cent.

Aprajita Sharma August 8, 2016 | Updated 13:16 IST
Monday Market Mantra: 5 things about banking stocks as you approach RBI monetary policy
Photo: Reuters

The Reserve Bank of India governor Raghuram Rajan will announce his last monetary policy on Tuesday with many expecting a status quo on the interest rate front.

As the RBI policy approaches, focus shifts to rate sensitive banking stocks, which are trading marginally higher in Monday's trade with Bank Nifty gaining 0.28 per cent.

Below are five recent developments in the banking sector that you must know:        

1) 4% inflation target suggests tight leash on liquidity to continue

Toeing Rajan's inflation fighting policies, the government last week set the inflation target at 4 per cent, plus or minus 2 per cent, until 2021. A fixed target may help anchor price expectations, the expected inflation trajectory is unlikely to sustain around the 4 per cent, suggesting even next RBI governor would not have much room to press the rate cut button. Factors such as salary hike of government employees thanks to seventh pay commission, related pickup in urban demand along with monsoon-related rural demand pose upside risk to inflation.

ALSO READ: Govt pegs consumer inflation target at 4%, cementing Rajan legacy

2) Bank capitalisation

The government last month announced a sum of Rs 22,915 crore for recapitalisation of 13 public sector banks. State Bank of India (SBI) is to receive the largest allocation of Rs.7,575 crore. Indian Overseas Bank and Punjab National Bank are to get Rs 3,191 crore and Rs 2,816 crore respectively.
Moody's Investors Service recently said this infusion may provide some respite to the public sector banks (PSBs), but their capital needs are significantly higher than the budgeted amount.

3) Mega merger of banks

The government is said to be considering a mega merger of 26 banks, which will create six big lenders, a Reuters report claimed in June citing government sources.

Major banks like State Bank of India, Punjab National Bank, Canara Bank, Union Bank, Bank of Baroda and Bank of India may lead the merger. Syndicate Bank, IOB and UCO Bank may be merged with Canara bank, while Central Bank and Dena Bank may be merged with Union Bank. Other banks like Andhra Bank, Bank of Maharashtra, Vijaya Bank may be merged with Bank of India.

4) Bank Nifty

Bank Nifty has fallen 3 per cent from the June policy meeting to now, while it shed over 10 per cent year-to-date.

5) Stock movement from June policy to now

Banking stocks on the Bank Nifty index have fallen up to 11 per cent from the June monetary policy to now, with the YES Bank leading the slump. Canara Bank, IndusInd Bank and HDFC Bank dipped 9 per cent, 6 per cent and 4 per cent, respectively. These stocks have declined a whopping 70 per cent so far this year.

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