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Monday January 5, 11:50 AM
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Indian bank shares rally, rate cuts boost outlook
MUMBAI (Reuters) - Indian bank shares rallied on Monday as deep rate cuts were seen boosting earnings by reducing consumer defaults and improving income from treasury operations.
By 0602 GMT, No. 2 lender ICICI Bank (ICICIBANK.NS : 850.9 -14.6
) was up 4.3 percent at 491.35 rupees while top lender State Bank of India (SBIN.NS : 2242.9 -11.75) rose 2.9 percent to 1,368 rupees.
The sector index was up 3.02 percent with all its 17 components rising, after gaining as much as 3.5 percent early.
The Reserve Bank of India (RBI) cut its two key short-term interest rates by 100 basis points each on Friday and the government unveiled a second economic package to bolster faltering growth.
The RBI also lowered the proportion of deposits banks must keep with the RBI by 50 basis points, which would release 200 billion rupees ($4.1 billion) when it takes effect on Jan. 17.
Analysts said the softer interest rates would curb rising bad debts in the banking system and treasury income from trading in bonds would rise sharply boosting profits in the near term.
"The RBI's proactive easing measures should help reduce systemic risks arising in the banking system," Morgan Stanley said in a research note.
The benchmark 10-year bond yield hit a record low of 4.86 percent on Monday following hefty rate cuts. The yield has shed 39 basis points this year after falling 254 points in 2008. Bond prices move inversely to yields.
The RBI cut the repo rate at which it lends to banks to an 8-1/2-year low of 5.5 percent, while the reverse repo rate was trimmed to 4 percent.
The RBI, which acted ahead of a scheduled policy review on Jan. 27, said the fundamentals of the economy were strong but there was evidence of activity slowing as recession gripped major economies.
Separately, the federal government opened the corporate bond market to more foreign investment and promised more capital to state-run banks.
