India’s benchmark banking shares index slumped the most in more than four years after the country’s central bank increased two interest rates, boosting the cost of funds.
The S&P BSE Bankex index, a gauge of 13 local lenders, slumped 4.8 percent in Mumbai, the biggest drop since July 6, 2009, after the Reserve Bank of India yesterday announced the rate increases. State Bank of India, the nation’s largest, fell 4.4 percent to 1,827.65 rupees.
The central bank increased the marginal standing facility rate to a record 10.25 percent from 8.25 percent and boosted the bank rate to the same level, tightening funding conditions after the rupee fell to a record low against the dollar last week. With lending growth at a three-year low, higher rates will make it difficult to pass on funding costs, said Vishal Narnolia, a Mumbai-based bank analyst at SMC Global Securities Ltd.
“Banks’ profitability will take a hit after this rate hike,” Narnolia said by phone. “The lenders will now have to raise deposit rates or borrow funds from money markets at higher rates.”
Bank lending in India grew 14 percent in the year to June 14, the slowest pace in at least three years, data compiled by the RBI show, as the cooling economy curtailed credit demand. The economy expanded 5 percent in the year ended March 31, the slowest pace since 2003, government data show.
ICICI Bank Ltd., India’s second-largest lender, fell 5.4 percent to 1,003.45 rupees, while Yes Bank Ltd., the worst performer on the Bankex index, plunged 9.9 percent to 450.95 rupees. Canara Bank fell 8.6 percent and Punjab National Bank fell 5.5 percent in Mumbai trading.
“The cost of borrowing will go up and liquidity will dry up following the measures announced yesterday,” said V.K. Sharma, chief executive officer at LIC Housing Finance Ltd., India’s second-largest mortgage company. “This unexpected measure will put lending margins under pressure.”