Indian Bank Stocks Fall to July Low on RBI’s Reserves Order

  • Lenders told to hold more in reserve to curtail liquidity
  • More than 5t rupees deposited since ban on high-value notes

Indian bank stocks slumped to an almost five-month low after lenders were ordered to set aside more deposits as reserves to curtail the surging liquidity produced by the government’s ban on high-value rupee notes.

The S&P BSE Bankex index sank 1.2 percent as of 10:34 a.m. in Mumbai, as Bank of Baroda, Punjab National Bank and State Bank of India all fell more than 1.5 percent. The gauge of bank stocks earlier slipped 1.9 percent to the lowest level since July 8.

The Reserve Bank of India asked lenders on the weekend to keep deposits raised from Sept. 16 to Nov. 11 in temporary reserves with the central bank, on which they will not be paid any interest, to help the banking system absorb the more than 5 trillion rupees ($73 billion) placed in customer accounts following the currency ban.

Deposits have surged at a faster pace than loan growth after people started turning in 500- and 1,000-rupee notes that are no longer legal tender, the RBI said in a Nov. 26 statement.

The so-called incremental cash reserve ratio will lower bank earnings by 6 billion rupees per week, yet another hit to profits already declining due to slower loan growth and surging bad loans, Credit Suisse Group AG analysts wrote in a note on Monday. The central bank’s move to curtail liquidity in the system will also lead to higher bond yields and may dampen lenders’ treasury profits, according to Credit Suisse.

The yield on government bonds due September 2026 jumped eight basis points to 6.31 percent, according to recent prices from the RBI’s trading system. It’s still down 48 basis points in November and fell last week to the lowest level for a benchmark 10-year security since April 2009. Falling bond yields help banks to improve trading profits as they’re required to hold at least 20.75 percent of deposits in government securities.

The incremental CRR is a temporary measure which will be reviewed on Dec. 9, the RBI said in its statement.

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