Bank Stocks Outlook for the week (24-28.10.2011)

Stocks of banks are likely to remain in a range next week in view of the Reserve Bank of India's second quarter monetary policy review on Tuesday. Expiry of the October derivatives series, and banks' Jul-Sep earnings would also drive sentiment. Wednesday and Thursday, India's financial markets are shut due to the Diwali festival. On Wednesday, there will be ceremonial trading--or 'muhurat' trading--for a couple of hours.

On Tuesday, the RBI is expected to raise the repo rate--the rate at which it lends to banks under its Liquidity Adjustment Facility--by 25 basis points to contain inflationary pressures. Wholesale Price Index-based inflation rate was 9.72% in September, way beyond the central bank's projection of 7.00% by March end.

Prime Minister's Economic Advisory Council Chairman C. Rangarajan Thursday said repo rate, at 8.25%, was still lower than the pre-crisis level of 9.00%, and the RBI would have to act to tame inflation. If inflation rises, the responsibility of (the) central bank becomes greater when inflation remains at a level which is way above the comfort zone. Therefore, in that situation, it becomes absolutely necessary for (the) central bank to act and that is what they are doing.

Besides the RBI's policy review, the quarterly performance of banks will be in focus next week. Axis Bank, Kotak Mahindra Bank, Union Bank of India, and Allahabad Bank are among the banks that will announce their Jul-Sep earnings in the week. Axis Bank's Jul-Sep net profit is expected to rise 25% from a year ago to 9.16 bln rupees due to strong growth in loans and fee income.