bank stocks: RBI fires Rs 1.16 lakh crore lifeline for banks. What it means for stock market investors

Directly targeting the liquidity deficit caused by rupee depreciation and capital outflows, Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday slashed the cash reserve ratio (CRR) of all banks to 4% in two tranches.

Even though there was no rate cut, the liquidity booster made bank stocks rally up 2%, with low-float PSUs leading the upside, as a CRR cut will provide a lifeline for banks to drive lending and also support their net interest margins (NIMs).

Not just banks, but NBFCs, real estate, auto, consumer durables, and infrastructure sectors also stand to gain directly from RBI’s accommodative measures and liquidity infusion, analysts said.

While admitting that systemic liquidity may tighten in the coming months due to tax outflows, increase in currency in circulation, and volatility in capital flows, the RBI Governor reduced CRR by 50 bps to 4% in two tranches from the fortnight beginning December 14 and December 28. The move by RBI’s rate-setting panel MPC would release primary liquidity of about Rs 1.16 lakh crore to the banking system.

“This surplus liquidity can be utilized by banks for lending, potentially stimulating economic growth, provided banks pass on the benefits of the cut to borrowers. Typically, a CRR reduction also enhances banks’ net interest margins,” said Anil Rego, Founder and Fund Manager at Right Horizons PMS.

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CRR reversal to pre-Covid 4% level could also lead to better and immediate transmission of cuts as and when the RBI commences the rate reduction cycle. Had there been no policy support, the system liquidity deficit would likely have crossed Rs 3-3.5 lakh crore by March 2025 according to Emkay Global estimates.

With a rate cut possible in February, banks with a higher share of floating rates would face pressures on margins, as the cost of funding would revise downwards with a lag.

“The latest data shows convergence of credit and deposit growth rates, mainly owing to slowdown in credit growth. Asset quality challenges especially amongst banks with the higher exposure to the unsecured segments was visible in the previous quarters and we expect stress to persist in H2, thereby keeping credit costs higher in H2,” said Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS.

He prefers larger banks with top picks being HDFC Bank, ICICI Bank, SBI and Bank of Baroda.

For investors, RBI’s neutral stance also provides much-needed stability. It is an opportune moment to focus on sectors poised to benefit from sustained domestic demand and India’s long-term growth trajectory, said Anirudh Garg, Partner and Fund Manager at Invasset PMS.

While global headwinds remain a concern, India’s strong macroeconomic fundamentals and policy continuity offer a robust foundation for investors to navigate the current landscape with confidence, he said.

In the near term, investors are anticipating other fine-tuning liquidity measures such as repo auctions apart from screen-based open-market operations in case core liquidity tightens further.

Nomura said the growth glass is half empty, not half full and the recent sharp slump in GDP growth should have highlighted the higher growth sacrifice involved in keeping policy rates elevated.