Bank stocks plunge on RBI rate hike

A minimal impact was felt by the market following the declaration of the credit policy by the Reserve bank of India, even as PSU bank stocks flopped following a declinein bond prices as a result of the surprise hike in short-term rates by the apex bank.

PSU bank scrips witnessed a broad-based decline. State Bank of India was down 2.5% to Rs 604.25. Select PSU bank stocks declined sharply. Allahabad Bank lost 7.7% to Rs 76.45, Bank of India shed 7% to Rs 86, Union Bank of India (UBI) shed 6.7% to Rs 103, Indian Overseas Bank shed 5% to Rs 73.30, Bank of Baroda lost 4.8% to Rs 181, Oriental Bank of Commerce shed 4.3% to Rs 272, and Punjab National Bank lost 4% to Rs 352.90.

PSU banks slumped as bond prices declined after RBI surprised the market by announcing a 25-basis hike in reverse repo rate to 5%. Reverse repo rate is the short-term benchmark interest rate. RBI left bank rate, which is used to price medium- and long-term loans unchanged at 6%, the lowest it has been in three decades.

Among private sector banks, ICICI Bank lost 2.4% to Rs 375.10. HDFC Bank shed 0.33% to Rs 536.65. But housing finance major HDFC advanced 2.5% to Rs 748.85.

Hello TaTrader ,Traderji and other seniors,
IF any of u would put forward an article,explaining, what is short term benchmarkmark interest rate(reverse repo rate),--why did RBI need to hike it,---How does it influence the Stockmarket, and the bond market,----why bond price is inversely proportional to interest rate,----how would open interest rate be influenced as a concequence of this increase, --why the PSU stock tumbled as a consequence of this increase ,----why the private sector banks had minimal effect while the PSU had a large impact---and maybe some more things related to this,I will be highly obliged to u all.
Regards ,
joy_mitali

Interest rates and the stock market are inversely related. When interest rates fall the stock market goes up. When interest rates rise stock market goes down.

Bonds versus stocks: This is supposed to be one of the most basic relationships. Much analysis suggests that what is good for stocks is bad for bonds, and vice-versa. Why? Stocks typically act well when the economy is improving, as expectations for increased profits will tend to drive equity valuations higher.

If the economy is improving, then at some point bondholders will assume that the RBI will raise interest rates to prevent inflation from getting out of hand. This means that as stocks rise, interest rates generally rise as well. Interests rates, mathematically, must move in the opposite direction of bond prices. Therefore, as stock prices rise (along with interest rates), bond prices usually fall.

Of course, this is not always the case. There are times when both stocks and bonds decline together. For example, very high inflation is not good for stocks. It can slow the economy and hurt investment (when interest rates rise to extremely high levels, it makes it too costly to borrow money). Ultimately, high interest rates will slow the economy and will take the wind out of the stock market's sales.

The bond market and commodities: Inflation is bad for the bond market. Many analysts look to the commodity markets for a leading indication of the direction of inflation. If commodity prices trade higher, then the market will start to look for inflation, which leads to higher interest rates and lower bond market prices.

Intermarket analysis can provide you with important clues as to the overall direction of the stock market. Understanding the fundamental relationships among various industries, as well as between various asset classes, can help you to keep your trading and investing on target. However, intermarket work is rarely helpful for short term traders.

If you are serious about intermarket relatioship then I would suggest you to read:

Intermarket Analysis : Profiting from Global Market Relationships by John Murphy

Nice write-up....Thanx,TATrader!

Dear TATrader,
Thanks a lot for being patient enough to write such basics.Actually as I have come from a different background,hence I am facing all this problems.But with all ur help(as well as the help of other seniors),I am slowly ,but surely making an advancement.
Thanks again from the core of my heart for ur valued response.
Regards,joy_mitali