Worst May Be Over for Banks

Banking shares recovered from initial losses after the Reserve Bank of India increased policy rates by an expected quarter of a percentage point.

Sajjad Hussain/Agence France-Presse/Getty Images

Banking shares recovered from initial losses after the Reserve Bank of India increased policy rates.

With interest rates unlikely to get much higher, the worst may be over for banks, said analysts.

In afternoon trade Thursday, the Bombay Stock Exchange's Bankex was down 0.1%, outperforming the 30-share benchmark Sensex, which was 0.4% lower.

Investors had drubbed banking shares Wednesday, fearing that the Reserve Bank of India would surprise the market with a sharper-than-expected rate increase, as it had in its previous monetary policy review in early May.

The inflation reading for May, released Tuesday, increased these fears further, pointing at a higher-than-expected rise in the wholesale price index.

But, there were no surprises from the RBI Thursday and banking shares pared losses.

Some bankers also said they did not feel the need to increase their own lending rates immediately, in response to the RBI's rate increase.

M.D. Mallya, chairman and managing director of Bank of Baroda, a large state-owned lender, told CNBC TV-18 that liquidity is reasonably comfortable at this point and he doesn't expect an increase in banks' lending and deposit rates immediately.

Analysts say interest rates in the system are at or close to their peak.

"At the mo [...]

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