Bank stocks rally up to 2% after RBI cuts CRR to 4%

Indian banking stocks saw a significant rally on December 6, 2024, as the domestic equity markets recovered, supported by strong performance from banking counters.

Top gainers on the BSE Sensex included ICICI Bank, Axis Bank, and State Bank of India (SBI), with sub-indices like Nifty PSU Bank, Nifty Private Bank, and Nifty Bank gaining up to 1.15%.

This uptick in banking stocks occurred despite the Reserve Bank of India (RBI) maintaining its key interest rates unchanged at 6.5% in its latest monetary policy meeting.

1) CRR rate cut boosts liquidity

A key development contributing to the rise in banking stocks was the RBI’s decision to reduce the Cash Reserve Ratio (CRR) by 50 basis points (bps), bringing it down to 4%. The CRR is the percentage of a bank’s deposits that must be held in cash, which affects the overall liquidity in the banking system. The CRR cut will be implemented in two phases: 25 bps each on December 14 and December 28, which will release approximately Rs 1.16 lakh crore into the system. This move is seen as a positive step to improve liquidity, supporting credit growth and strengthening the banking sector.

Financial experts have praised the decision, highlighting that it balances inflation concerns with growth needs. Kranthi Bathini, Director of Equity Strategy at WealthMills Securities, stated that this policy will encourage liquidity, making banking stocks resilient in the near term.

2) Boost to foreign currency non-resident (FCNR) deposits

Another contributing factor to the rise in banking stocks is the RBI’s increase in the interest rate ceiling for Foreign Currency Non-Resident (FCNR) deposits. This move is aimed at attracting more foreign capital inflows, particularly from Non-Resident Indians (NRIs), by making it more attractive for them to hold deposits in India. The central bank also introduced measures to stabilize the rupee against the US dollar, including relaxing norms for foreign portfolio investments and increasing the External Commercial Borrowing (ECB) limits.

These actions are expected to have a favorable impact on banking stocks, further reinforcing the resilience of the sector despite unchanged key policy rates.