India’s largest private-sector lender, HDFC Bank, is feeling the impact of the Reserve Bank of India’s (RBI) move to drain liquidity in the fight against inflation. As part of its strategy to address excess liquidity in the banking system, the RBI imposed an incremental cash reserve ratio (CRR), which has led to concerns about the impounding of deposits and its effect on banking stocks.
Since the announcement, banking stocks have experienced declines, with the Nifty Bank Index dropping nearly 2% compared to a 1.2% fall in the Nifty 50 index by August 22 closing. HDFC Bank, in particular, saw a drop of around 4%, the most significant decrease among its peers in the banking index.
Market analysts indicate that despite the short-term uncertainties related to the bank’s merger and a potential fall in net interest margins (NIMs), HDFC Bank remains a strong long-term investment option. The bank’s track record of earnings growth, high-quality assets, and industry-leading growth in loans and deposits are factors that support this perspective. Additionally, the growth in high-yielding unsecured products could offset the impact on NIMs.
‘Re-rating gradual’
However, analysts suggest that the re-rating of HDFC Bank might be gradual due to increased competition and the potential challenges posed by a high cash reserve ratio. The bank’s merger with HDFC, effective since July 1, has led to concerns that the RBI’s liquidity-draining measures might affect net interest margins more significantly than expected. The bank had already anticipated a margin decline for the September quarter as a result of the merger.
The RBI’s decision to employ incremental CRR as a tool to manage excess liquidity surprised the market, causing bank stocks to suffer. The measure requires banks to maintain an additional cash reserve of 10% on the increase in their net demand and time liabilities (NDTL) between May 19 and July 28. This temporary measure aims to remove INR1 lakh crore of excess liquidity from the banking system. Despite this, the RBI assures that there will be sufficient liquidity to meet the economy’s credit needs.
