Why Banking Stocks Fall While Repo Rate Cut: The central bank RBI cut the repo rate after nearly five years but it did not bring out the stock market. The reason for this is that the market had already estimated about this deduction, so in a way the rise in the market had already come. However, in the financial year 2025, the banking shares were assaulted on the announcement of the last monetary policy of RBI as there was no talk about softening the liquidity. The RBI has reduced the repo rate from 6.50 per cent to 6.25 per cent.
Apart from Repo Rate, CRR was also expected to cut
In the last MPC meeting on 6 December 2024, the then RBI Governor Shaktikanta Das had reduced the CRR ie the cash reserve ratio by 0.50 per cent to 4 per cent. CRR is part of the total deposit of the bank which is kept as a reserve amount with the RBI and if it is deducted, it makes more cash available with the bank and increases liquidity in the system. Apart from this, RBI had inserted Rs 1.5 lakh crore in the system to increase liquidity in January. In such a situation, investors were hoping that in addition to the repo rate cut, the RBI could announce more to increase liquidity in the system. However, after the first MPC meeting of the current RBI Governor Sanjay Malhotra, there was no such announcement in the speech, then the banking stocks fell from the structure.
What do experts say?
Madhavi Arora of MK Global says that due to lack of liquidity, there is disappointment in the market but such announcements should be made only after the MPC meeting, if not necessary, they can be implemented if necessary. For example, earlier in January, RBI had announced a purchase of Rs 60,000 crore under the Open Market Operations (OMO) to increase liquidity, out of which Rs 20,000 crore has already been made. Anvish Jain, head of Canara Robco Mutual Fund, believes that this can be done further as the Governor said that RBI can take steps if needed to increase liquidity. The announcement made by the RBI in January has not been fully implemented yet.
Liquidity more dangerous than a limit
RBI takes necessary steps to increase liquidity but more liquidity is also dangerous than a limit. As part of efforts to increase liquidity since the last few weeks, the weed interbank call rate has come below the repo rate. Watched interbank call rate means the interest rate on which banks lend overnight to each other and the repo rate is the interest rate on which RBI lends overnite to banks. One reason for not excessive liquidity is that it can make the currency and weak.
However, now, MK Global estimates that if the RBI does not take any further initiative to increase the liquidity, then by the end of March 2025, a pressure of Rs 2.5 lakh crore can be seen, that is, the system liquidity will require so much support. In such a situation, the market is eyeing what steps the RBI takes during unstable imbalance between growth and inflation.
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