Bank stocks including private heavyweights Axis Bank, ICICI Bank, HDFC Bank and others jumped up to 2%, pushing the Nifty Bank around 650 points higher on Friday morning after a report said that the Reserve Bank of India (RBI) is not considering rate hikes to be the best way to defend the falling rupee.
The Reserve Bank of India has other levers to deploy and the options are on the table, which are being considered in coordination with the government, Reuters reported citing people familiar with the matter. Inflation continues to remain subdued, and this - not the currency- will guide RBI’s policy on rate hikes, the report added.
This comes as rupee dropped around 6% since the beginning of the raging war between Iran and US late in February, tumbling to a record low near 97 per dollar on Thursday. "There doesn't seem to be an urgent need for the central bank to jump into rate hikes," Reuters quoted a source as saying.
Also Read | RBI not in favour of rate hikes to defend rupee, prioritises inflation
Rate hike or no rate hike
Indonesia and Philippines have already raised rates as inflation and currency depreciation risks rise. Interest rate swap markets are pricing in at least 40 bps rate hikes by RBI over the next three months and more than 100 bps over the next year. The report quoted another source as saying that in order to defend the falling rupee, RBI will have to introduce steep rate hikes as smaller increases would have little impact while crimping demand.
Meanwhile, economists at Standard Chartered said in a note on Thursday that RBI is likely to start raising interest rates as early as June on increasing inflation risks from higher crude prices "We expect 50 bps of hikes, split equally between June and August. However, if there is no hike in June, the repo rate could be hiked by 50 bps in August,” it said.
Also Read | RBI rate hikes to start in June, says Standard Chartered
The Reserve Bank of India's rate-setting panel is set to announce its rate decision on June 5, in its second meeting since the Iran war began. Last month, the RBI had said it would watch the duration and extent of the conflict-led disruptions.
Bank stocks jump
Banks are typically considered among the most exposed sectors to RBI’s repo rate changes. The report that the RBI is unlikely to increase rates may have boosted the stocks. AU Small Finance Bank shares were the top gainers on the index, jumping more than 2%. Axis Bank, ICICI Bank and HDFC Bank shares gained around 2% each, while IndusInd Bank shares gained over 1%.
Bank of Baroda, Kotak Mahindra Bank, Federal Bank and Punjab National Bank (PNB) shares gained nearly 1%, while those of IDFC First Bank, Union Bank of India, State Bank of India (SBI) and Canara Bank shares recorded marginal gains.
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