Bank NBFC shares rally

Shares of banks and non-bank lenders went on the fast lane after the Reserve Bank of India’s Monetary Policy Committee retained the key rates unchanged and maintained its accommodative stance on February 10, contrary to expectations of some economists.

The central bank’s projection of a decline in inflation in the second half of the next financial year towards its medium target of 4 percent and its insistence on keeping monetary policy accommodative for “as long as necessary” for a durable economic growth led to a sharp rally in government bond prices.

The yields on the benchmark 10-year bond – the 6.54 percent 2032 government bond – has dropped to 6.72 percent from 6.80 percent.

The decline in government bond yields or the rise in bond prices is positive for banks as it lowers the mark-to-market losses they have seen in the March quarter so far. State-owned bank stocks, in particular, had come under pressure earlier this month as government bond prices fell following a higher-than-expected fiscal deficit target set by the government for 2022-23.

The Union Budget, presented on February 1, pegged the fiscal deficit target for 2022-23 at 6.4 percent as against economists’ expectations of around 6 percent.

The non-bank lenders saw their shares gain on the day on the perception that the central bank’s projection of lower inflation in 2022-23 would result in less aggressive hikes in monetary policy rates going ahead.

Prior to the MPC’s meeting, economists had projected the central bank to raise the reverse repo rate at today’s meeting while overall market participants expect the central bank to raise interest rates by 75-100 basis points in 2022-

With MPC retaining its focus completely on growth and expecting a moderation in inflation, it is likely that rates in the money market, where non-bank lenders are major borrowers, could remain lower for longer.

At 11:10 am, the Nifty Financial Services index was up 1.4 percent at 18,112.95 points on the National Stock Exchange.