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Bank stocks up on rate cut, hope for more cuts

Shares of Indian banks rose on Monday following a cut in the benchmark Bank Rate by the Reserve Bank of India post-market hours on Friday, triggering hopes of further rate cuts, analysts said.

In mid-morning, bank shares were higher by up to 4 per cent in an overall flat market, with the Sensex marginally up by 0.34 per cent.

State-run State Bank of India, India's largest commercial bank, was 2.8 per cent higher at Rs 240.45, off Rs 243.45 high. Bank of Baroda, another large state-run bank was up 3.74 per cent at Rs 61.00, off Rs 62.50 high.

RBI announced after trading hours on Friday, a 50 basis point cut in the key bank rate to 7.5 per cent. The bank rate is the rate at which the RBI lends to commercial banks and is used by banks to set their lending rates.

Analysts said the move came earlier than expected though the cut was lower than anticipated.

SBI cut its prime lending rate by 50 basis points to 11.5 per cent effective Monday.

Other leading banks are expected to follow.

Salomon Smith Barney said on Monday it expected the central bank to further reduce rates.

"We expect another rate cut of about 50 basis points around April," it said in a market commentary. "The timing and extent of this cut will be influenced by the position of fiscal deficit and the level of inflation."

Analysts said the rally in government security prices will raise the valuations of bank portfolios, particularly those of state-run banks which have large government security holdings.

The RBI also cut banks' cash reserve ratio by 50 basis points to 8 per cent and some analysts expect this to stoke inflation.

"Liquidity was never an issue so the excess money will be diverted to treasury operations and would also result in inflationary pressures," said Jamshed Desai, head of research at Taib Securities.

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