Banking stocks cheered and the benchmark BSE Sensex surged by over 1.8 per cent during intra-day trade to cross the 17,000 mark on Friday,buoyed by the 50 basis point cut in cash reserve ratio announced by the Reserve Bank of India. The Sensex ended the days trade with a gain of 1.5 per cent to close at a two-month high of 16,995. The broader Nifty ended the day with a gain of 81 points or 1.6 per cent at 5,127.
The capital goods and the banking index that have been under pressure for quite some time,led the gains as the two sectoral indices rose by 3.3 and 3.2 per cent respectively. Other indices too gained as RBI tilted its action in favour of growth.
The CRR rate cut and RBIs tilt in favour of growth is an important signal as it will ease liquidity and provide encouragement to companies to once again revisit capital investment and growth discussions, said Kaku Nakhate,President & Country Head ,Bank of America.
Banking stocks,especially the public sector banks jumped sharply. While the State Bank of India rose 5.2 per cent,Canara bank jumped 9.6 per cent during the day. Bank of India and IDBI Bank closed with gains of 6.8 and 4.8 per cent respectively. The private sector banks too rose between 3 and 5 per cent. Among the Sensex companies,L&T was the biggest gainer as a result of the good set of numbers announced by the company on Monday and the CRR cut by the RBI. Metal,Auto and real estate indices also rose sharply during the day.
The direct impact of a CRR cut on bank earnings is immaterial but the indirect impact in terms of lower incremental cost of wholesale funds and lower bond yields are material. The direct impact of a CRR cut will be that banks earnings will increase by 1-3 per cent for FY13 as the CRR funds, said Mahrukh Adajania of Standard Chartered Securities.