Banking stocks fell more than 3% on Thursday led by private sector heavyweights ICICI Bank and HDFC Bank after the Reserve Bank of India (RBI) did not alter its stance on liquidity in the monetary policy announcements.

The Nifty Bank index fell by nearly 600 points or 1.3%. Around 2:30 pm 9 out of 12 stocks in the index were trading in the red.

The top loser was Axis Bank which fell 3.4% to the day’s low of Rs on the 1,032.20 on the NSE. HDFC Bank fell 1.5% intraday while ICICI Bank declined nearly 2%. The biggest drags in terms of index contribution were HDFC Bank and ICICI Bank.

“The policy maintained a status quo while the markets were expecting a change in liquidity stance,” an Axis Mutual Fund note on RBI MPC said adding that it expected a change in liquidity stance which did not materialise.

However, it said that the central bank will effectively utilise liquidity management tools.

Banking stocks fell despite the Monetary Policy Committee (MPC) assuaging Street’s concerns that it will be facilitating liquidity in the system through different liquidity management tools at its disposal. “Let me reiterate that our policy stance is in terms of interest rate which is the principal tool of monetary policy in the current framework. Our stance of withdrawal of accommodation should be seen in the context of incomplete transmission and inflation ruling above the target of 4% and our efforts to bring it back to the target on a durable basis,” Governor Shaktikanta Das said in his speech today.”So far as liquidity conditions are concerned, these are being driven by exogenous factors, which are likely to correct in the foreseeable future, aided by our market operations. On our part, the Reserve Bank remains nimble and flexible in its liquidity management through two-way main and fine-tuning operations, in both repo and reverse repo,” Das said.

He said that the RBI will deploy an appropriate mix of instruments to modulate both frictional and durable liquidity to ensure that money market interest rates evolve in an orderly manner and financial stability is maintained.

Calling today’s policy a non-event, expert Vikas Garg – Head of Fixed Income, Invesco Mutual Fund said that the MPC maintained the status quo on policy rates and stance as ‘withdrawal of accommodation’. He added that there was no meaningful announcement to immediately ease systematic liquidity.

Mukesh Kochar, National Head of Wealth at AUM Capital said that the tight liquidity in the banking system could continue for some more time as the RBI focus is on bringing inflation towards the 4% target.

However, Achala Jethmalani, Economist at RBL Bank sees the current RBI policy as ‘actively disinflationary’ even as it stays nimble in its liquidity management approach.

Esha Khanna, Assistant Professor at NMIMS Sarla Anil Modi School of Economics said that RBI’s emphasis remains on conducting two-way operations and VRRR (Variable Reverse Repo Rate) auctions to maintain liquidity. In her view, it lends pliancy to RBI to manage liquidity conditions as and when needed in the direction required and makes policy accommodative enough to ensure durable growth.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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