Reserve Bank of India raised the Reverse Repo and Repo rates by 25 bps with immediate effect late Thursday evening. So how would this rate hike move impact-banking stocks? Experts reveal.

RBI raised the Reverse Repo and Repo rates by 25 bps with immediate effect late yesterday evening. While few banks feel this is an untimely move, many industry watchers believe that this is in line with global trends and inflation levels back home in India.

The central bank claims that the rates have been hiked in view of economic and monetary conditions. Following this rate hike, 10-year bond yield will go up from current 7.67% to 7.8 per cent.

While, the rate hike is a reflection of liquidity tightness, banks and customers could take a hit alike. So how would this rate hike move impact-banking stocks? Experts feel that bank stocks might fall further and this will not be positive for the equity markets.

Banks to see negative impact in short-term

Investment advisor, PN Vijay says "Banking stocks will definitely start negatively; there is no doubt about that. Some banks have increased interest rates in the last three months. So they may stabilise but banks would be affected with the reverse repo hike."

Kanan Shah of Networth Stock Broking [Get Quote] believes the same. She says, "Banking stocks will be under some short-term pressure. Public Sector banks will be under greater pressure as compared to others. This is because government yeilds will go up and hamper the investment books of these banks. However, private sector banks will take less of a hit."

Chairman at HDFC [Get Quote], Deepak Parekh believes that while the rate hike was expected, its timing is wrong.

He says, "I think it would be certainly seen as a negative move and I don't the market on many occasion has gone down 461 points so maybe the timing was not right. But the market was on a downward spiral for last few weeks and probably it was a wrong day and it could have been done on a Saturday when the markets are not open. But it had to be done sometime and it will have some negative impact on markets."

Growth will not be hampered

Experts believe that this short-term slowdown will not hamper the overall growth of banks.

Shah says, "Inspite of all this we still feel that growth will be on track for these banks. Most banks had raised their lending rates last month, so I don't think they would be raising these again. Going ahead, banking stocks will move along with the markets.

Picks

Shah says, "The picks we have identified post this fall are Bank of Baroda [Get Quote], State Bank of India [Get Quote], ICICI Bank [Get Quote] and Federal Bank [Get Quote]."

Sharmila Joshi of Asit C Mehta says that some of the better quality banks certainly look reasonable for investment.

"The future looks reasonable. I think a quarter percentage point hike is not enough for people to stop taking loans. One is going to see action on that. The valuations look reasonable whether it is a State bank of India, which has taken quite a beating, whether it is an ICICI bank or an HDFC Bank. Some of the better quality banks certainly look very reasonable for investment."

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