Five factors that may impact

banking stocks ahead of RBI

monetary policy
Aprajita Sharma New Delhi Last Updated: August 8, 2016 | 13:16 IST

The Reserve Bank of India governor Raghuram Rajan will announce his last
monetary policy on Tuesday with many expecting a status quo on the
interest rate front.

As the RBI policy approaches, focus shifts to rate sensitive banking stocks,
which are trading marginally higher in Monday's trade with Bank Nifty
gaining 0.28 per cent.
Below are five recent developments in the banking sector that you must
know:

1) 4% inflation target suggests tight leash on liquidity to continue

Toeing Rajan's inflation fighting policies, the government last week set the
inflation target at 4 per cent, plus or minus 2 per cent, until 2021. A fixed
target may help anchor price expectations, the expected inflation trajectory
is unlikely to sustain around the 4 per cent, suggesting even next RBI
governor would not have much room to press the rate cut button. Factors
such as salary hike of government employees thanks to seventh pay
commission, related pickup in urban demand along with monsoon-related
rural demand pose upside risk to inflation.

ALSO READ: Govt pegs consumer inflation target at 4%,

cementing Rajan legacy

2) Bank capitalisation

The government last month announced a sum of Rs 22,915 crore for

recapitalisation of 13 public sector banks. State Bank of India (SBI) is to
receive the largest allocation of Rs.7,575 crore. Indian Overseas Bank and
Punjab National Bank are to get Rs 3,191 crore and Rs 2,816 crore
respectively.
Moody's Investors Service recently said this infusion may provide some
respite to the public sector banks (PSBs), but their capital needs are
significantly higher than the budgeted amount.

3) Mega merger of banks

The government is said to be considering a mega merger of 26 banks, which

will create six big lenders, a Reuters report claimed in June citing
government sources.

Major banks like State Bank of India, Punjab National Bank, Canara Bank,
Union Bank, Bank of Baroda and Bank of India may lead the merger.
Syndicate Bank, IOB and UCO Bank may be merged with Canara bank,
while Central Bank and Dena Bank may be merged with Union Bank. Other
banks like Andhra Bank, Bank of Maharashtra, Vijaya Bank may be merged
with Bank of India.
4) Bank Nifty

Bank Nifty has fallen 3 per cent from the June policy meeting to now, while
it shed over 10 per cent year-to-date.

5) Stock movement from June policy to now

Banking stocks on the Bank Nifty index have fallen up to 11 per cent from
the June monetary policy to now, with the YES Bank leading the slump.
Canara Bank, IndusInd Bank and HDFC Bank dipped 9 per cent, 6 per cent
and 4 per cent, respectively. These stocks have declined a whopping 70 per
cent so far this year.