The banking stocks are expected to stay suppressed for some more times to come. This fact has been bolstered by the asset liability mismatch, which some of the prominent public sector banks had been revealing these days. With the advent of the monetary policy disclosed by the RBI initiating its move to hike the repo rate and the reverse repo rate to curb the inflationary pressure seems to have been worsening the situations of these banks especially when they are already reeling under the asset liability mismatch. Recently only, the RBI have increased the repo rate and reverse repo rate by 25bps. Repo rate is the rate at which the central bank lends to the commercial banks and the reverse repo rate is the rate at which the commercial banks lend to the central bank. However, the central banks are trying hard to suppress the inflationary pressure in the economy, but this is just one facet of it. Increase in the rates would lead to the interest rate hike thereby leading to the rise in the cost of funds, hence dampening the credit growth rate in the economy. Banks are already bearing the brunt of their balance sheets overburdened with the NPA’s( Non performing Assets), rise in the rate of interest( however short term it may be) would lead to more liquidity crunch with the banks. The annual reports of the Punjab National Bank states that the asset liability mismatch is already resorting at 54% and when it crosses 60%, the bank would be brought under the ambit of the acute financial crunch with it. The banks have not even dared to raise the deposit rates as the result of which the investors are switching their money to some other alternative avenues which had further widened the asset liability gap in these banks. The investors have been doing so because of the rise in the inflationary pressure in the economy which is holding them unable to reap out any positive returns on their investments in banks. The banks thus seem to have got trapped in the vicious web of liquidity crunch, inflationary pressures which are the cause of concern deeply to be looked into by the Central Bank. The central banks should meticulously carry forward with their monetary policies after giving due heed to the overall situation in mind. The rise in the rates of interest without raising the depository rates would give a more battering to the banking stocks which are already scrambling over the 200 day moving averages or just close above it. Even if you would be looking into the charts of Punjab National Bank, it has already broken down the 200DMA and has still not recovered. This acute suppression in these banking stocks seems to be one of the major reasons which is posing hindrance to the Nifty to rise up to the higher levels. The declaration of the monetary policy gave a tight blow to the nifty which moved down by almost 100 points on 25th Jan; 2010. Even on 26th jan;2010, the selling pressure seems to be in continuance signifying the extent of bearishness still prevailing in the market with most of the banking stocks hit hard. So the current scenario doesn’t seem to be opportune enough to opt for the banking stocks as the part of share investment. But for the long term perspective one can choose to bet on the banking stocks at the lower levels. But giving due regard to the present scenario it is better to wait for the pertinent time to invest in these banking stocks. Unless the formulation of the monetary policies is met out with the increase in the deposit rates of the banks, the banks would continue to stay victim of this trap. So till the economic situation gets stabilized, it is recommended to stay away from the banking stocks as a part of your major chunk of portfolio. So whenever your broker advices you to make share investment in banks, just stay cautious and seek advice from advisors who are in constant touch with the market before blindly relying on their set of stock tips.
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