Banking stocks lead free-fall

Wed, Jul 2 12:50 AM

As the market tumbled again, banking stocks led the fall, as worries over higher inflation and rising interest rates not only heightened fears about the slowing economy but also cast a shadow over banks' profitability in the coming quarters. The Reserve Bank of India's decision last week to tighten money supply has since forced commercial banks to raise lending rates, hikes that would surely have a bearing on future corporate profits and investments.

Most banks have increased their prime lending rates by 50 basis points (or half a percentage point), while some like ICICI Bank have even brought bigger-than-expected increases. The country's largest private bank has increased its key lending rate by 75 basis points.

And on Tuesday, State Bank of India Chairman O.P. Bhatt said he wasn't sure if this was last of interest rate hikes. "Further hike in PLR (primary lending rate) isn't ruled out," Bhatt said, adding he expected growth in credit offtake slowing down by 2 to 3 percentage points in 2008-09 because of higher lending rates.

His comments added to the bearish mood in the market. The Banking Index of the Bombay Stock Exchange lost 5.6 per cent.

The spike in interest rates also hurts banks' investment in government securities. Bhatt said SBI would take a hit of around Rs 1,000 crore on account of bond depreciation, while Chairman and Managing Director of Punjab National Bank said his would lose about Rs 175 crore.

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