A clutch of bank stocks waned on Tuesday after RBI cut bank rate by 25 bps in its Credit Policy for 2003-04.

State Bank of India (down 1.93% to Rs 277.50), Andhra Bank (down 4.26% to Rs 29.20), Bank of Baroda (down 3.36% to Rs 83.45), PNB (down 2.72% to Rs 114.60), Union Bank (down 2.57% to Rs 26.50), Corporation Bank (down 2.43% to Rs 142.50), IDBI Bank (down 2.24% to Rs 24) and J&K Bank (down 1.27% to Rs 143.80) were some major losers in the sector on Tuesday.

Reserve Bank of India governor Bimal Jalan announced a cut in bank rate by 25 bps to 6% from 6.25 and simultaneously, a cut in cash reserve ratio by 25 bps to 4.50% from 4.75% (effective 14 June). Repo rates were left unchanged. This may prove beneficial for banks, as bond prices should move lower, increasing treasury profits.

However, that optimism was offset by the fact that the Monetary Policy noted that rates were relatively low and there was not much scope for a further reduction. If interest rates are contained from moving south, bond prices will stabilise and treasury profits will stagnate.

In any case, analysts say the fact that interest rates may stabilise has already been discounted by the market. But the bright side of things is that interest rates are not expected to increase too. Perhaps, the current decline in banking stocks is in knee-jerk reaction to RBI's interest rate floor notification. These shares are now expected to recoup after the correction.