Banking and NBFC Stocks Rally After RBI Liquidity Measures

On Tuesday, January 28, banking and NBFC stocks gained prominence as shares surged by up to 3.3% following the Reserve Bank of India's (RBI) announcement of liquidity-boosting measures. The move came after a thorough assessment of the prevailing financial and liquidity conditions.

Canara Bank witnessed a 3.3% jump in its stock price, while AU Small Finance Bank’s shares climbed 3% to ₹580.85 on the BSE. Punjab National Bank (PNB) also saw a 3% rise in early trade.

IDFC First Bank's stock gained 2.85%, reaching ₹58.38 at its peak, whereas Bank of Baroda shares advanced by 2.5%. Axis Bank’s stock appreciated by 2%, ICICI Bank saw a 1.77% increase, and HDFC Bank rose by 1.72%. Meanwhile, IndusInd Bank registered a 1.6% gain, and the State Bank of India (SBI) saw a modest 1% increase.

Conversely, Kotak Mahindra Bank recorded a slight dip of 0.5%, while Federal Bank experienced a significant 6.2% decline due to underwhelming Q3 earnings.

The Nifty Bank index gained 1.2% during intraday trading.

RBI's Liquidity Injection Measures

On January 27, the RBI announced a series of measures to infuse liquidity into the banking system. These included a ₹60,000 crore Open Market Operation (OMO) purchase in three phases and a Variable Rate Repo (VRR) auction scheduled for next month.

The OMO purchases will occur in three installments of ₹20,000 crore each, during which the central bank will acquire government securities from the open market to regulate liquidity and influence interest rates. The auctions are set for January 30, February 13, and February 20.

A separate RBI release outlined the purchase of specific government securities—7.59% GS 2029, 7.18% GS 2033, 7.10% GS 2034, 6.79% GS 2034, and 7.18% GS 2037—amounting to ₹20,000 crore on January 30. The auction, using a multiple-price method, is scheduled between 10:30 AM and 11:30 AM on the same day.

Additionally, the RBI will conduct a USD/INR buy/sell swap auction worth $5 billion for a six-month tenure on January 31. A 56-day VRR auction amounting to ₹50,000 crore is also planned for February 7, 2025, adding to the six VRR auctions conducted earlier in January to support liquidity-strapped lenders.

In response to a liquidity review, the RBI had introduced daily VRR auctions on January 15, with reversals occurring the following day. All VRR auctions are held on working days in Mumbai.

Addressing Liquidity Shortages

The liquidity infusion comes amid a significant systemic liquidity shortfall of approximately ₹3.13 lakh crore. Banks are grappling with expensive deposits, exacerbated by foreign portfolio investors (FPIs) offloading Indian equities and converting funds into dollars. As of January 14, banking system liquidity was in deficit by ₹2.09 lakh crore, as per RBI data.

One of the primary causes of the sharp liquidity squeeze is the RBI's aggressive intervention to stabilize the rupee-dollar exchange rate. Foreign investors have been selling Indian equities and repatriating funds, contributing to the liquidity crunch.

The central bank has assured further intervention "as appropriate" to maintain orderly liquidity conditions. These steps precede the upcoming Monetary Policy Committee (MPC) meeting, scheduled for February 5.

Market Outlook

Earlier in January, Nomura’s Asia Insights report had projected that additional VRR auctions, buy/sell swaps, and OMOs would be necessary to address the tightening rupee liquidity.

Nomura welcomed the RBI’s liquidity infusion, anticipating a positive impact on loan growth and net interest margins (NIMs) for Indian banks and NBFCs. However, the brokerage firm stressed that systemic liquidity must return to neutral levels for sustained loan and deposit growth—an issue the RBI’s current measures do not fully resolve.

Nomura’s top stock picks include Axis Bank, HDFC Bank, and Shriram Housing Finance, maintaining a "Buy" rating on Axis and HDFC Bank. They expect liquidity-constrained banks and large NBFCs to benefit from easing liquidity conditions. Among NBFCs, Shriram Housing Finance remains their top pick, while they also hold a Buy rating on SBI Cards.

While AU Small Finance Bank and Bandhan Bank may see some relief in growth and NIMs, Nomura warned that asset quality remains a key concern for these stocks.