Banking stocks are buzzing with RBI undertaking 2 measures to reduce rates and ease liquidity: Firstly, it has cut the marginal standing facility (MSF) rate (or the rate at which RBI lends to banks overnight to meet emergencies and shortfall) by 50 basis point cut from 9.5% to 9%, with immediate effect. Secondly, beginning October 11, it will open a new lending window to banks for 7 and 14 days, in addition to the current overnight lending (i.e. 3 lending windows of 1,7 and 14 days). These longer tenor repos can release liquidity of upto Rs. 17,000 crore in the money market.

This will lead to a sharp drop in short-term rates. Thus, banks relying on short term lending are the bigger gainers this morning – Yes Bank up 6.6%, Indusind Bank up 5.4%, Axis Bank up 3.5%. Sector index Bank Nifty is trading higher by 2.2% at 10,360.

The 10-year Indian Government bond yields have also contracted 176 basis points this morning and are currently ruling at 8.50%. These yields had peaked to 8.87% on 23^rd September.