Banking stocks today rose by as much as 4 per cent after the RBI cut a short-term interest rate, effectively lowering lenders' cost of funds ahead of the busy festive season.
The RBI yesterday lowered the marginal standing facility (MSF) rate, at which it lends emergency funds to banks, by 0.5 per cent to 9 per cent.
Shares of Yes Bank rose by 4.11 per cent, while ICICI Bank gained 2.26 per cent, Federal Bank (1.29 per cent), Canara Bank (0.84 per cent) and BOB (0.72 per cent).
Led by the gains in these stocks, the BSE banking index settled 0.67 per cent higher at 11,552.85.
"After the RBI's surprising announcement in the reduction of the MSF lending rate by 50 basis points, banking stocks surged," said Raghu Kumar, Co-founder, brokerage firm RKSV.
"As an immediate impact of these measures, short-term interest rates are likely to reduce proportionately. The measures are positive for more wholesale funded banks, as it is likely to result in further decline in their costs of funds by roughly 5-10 bps on an annualised basis (the reduction in cost across banks would be in congruence with its dependence on wholesale funds)," Angel Broking said in a report.
With rupee recovering from all-time low levels, the RBI yesterday cut the MSF rate by 0.5 per cent to 9 per cent with an aim to improve liquidity and boost economic activities.
This was the second cut in the overnight interest rate since September 20 mid-quarter monetary policy review when it was lowered to 9.5 per cent from 10.25 per cent.