Last update:December 04, 2024, 2:10 p.m. IST

Among private banks, HDFC Bank rose around 2%, making it one of the biggest gainers on Nifty and Sensex.

Bank stocks recover ahead of RBI MPC

Several banking stocks, including HDFC Bank, ICICI Bank and SBI, posted strong gains on Wednesday, December 4, driven by expectations of supportive monetary policy from the Reserve Bank of India (RBI).

Shares of PSU banks like UCO Bank and Central Bank of India jumped as much as 8% as the RBI’s rate-setting panel began a three-day meeting. The entire financial sector showed positive momentum, with the Nifty Bank and Private Bank indices each increasing by almost 1%, while the PSU Bank index gained almost 1.5%. The Nifty Financial Services index climbed more than 1%.

Among private banks, HDFC Bank rose around 2%, making it one of the biggest gainers on Nifty and Sensex.

The rally in financial stocks is fueled by market expectations that the RBI may announce a cash reserve ratio (CRR) was reduced this Friday, which is seen as a measure likely to boost bank profitability.

Could a reduction in CRR benefit banks?

Global brokerage firm Citi said a 50 basis point reduction in CRR would bring the highest net interest profit (NII) to PSU banks like PNB, SBI and Bank of Baroda. In the private banking sector, Federal Bank, HDFC Bank and Axis Bank are expected to benefit.

Aamar Deo Singh, senior vice president of research at Angel One, suggested that a reduction in CRR, currently at 4.5 per cent, would increase banks’ flexible resources, thereby improving their profitability.

Abhishek Pandya, research analyst at Stoxbox, noted that the Nifty Bank index rose 6% in the last eight trading sessions, reflecting strong bullish momentum. This increase is largely attributed to expectations that the RBI would reduce the CRR by 25 basis points from the current 4.50% to 4.25%. “This reduction in CRR is expected to improve market liquidity,” Pandya explained.

Pandya also highlighted that the second quarter results revealed a slowdown in credit growth, which had fallen to 12-13% from 17-18% earlier. A reduction in CRR could help boost credit growth again.

The meeting of the Monetary Policy Committee (MPC) of the RBI began on Wednesday, December 4 and the policy decision is expected to be announced on Friday, December 6.

Bank stocks to buy

“In a period marked by declining credit growth and significant asset quality concerns, HDFC Bank, ICICI Bank and SBI stand out as strong medium to long term investment choices,” Pandya said .

Vikas Jain, head of research at Reliance Securities, recommended SBI, Union Bank, Canara Bank and RBL Bank as promising stocks from current levels.

Ajit Mishra, senior vice president of research at Religare Broking, advised a selective approach within the banking sector, despite the recent strong performance of the banking index. He highlighted HDFC Bank, Federal Bank and ICICI Bank among private banks, while SBI and Bank of Baroda were considered the top picks in the PSU segment due to their relative strength.

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