Indian banks CDS wider while the stocks are up after budget speech

Indian Finance Minister Pranab Mukherjee released his new 2010-2011 budget today which among many other things promises the equivalent of US$3.58 billion (1US$=Rs.46.135) in state funds to recapitalize the public sector banks and an unspecified amount to recapitalize the regional rural banks.

From his speech, he says “During 2008-09, the Government infused Rs.1900 crore as Tier-I capital in four public sector banks to maintain a comfortable level of Capital to Risk Weighted Asset Ratio. An additional sum of Rs.1200 crore is being infused now. For the year 2010-11, I propose to provide a sum of Rs.16,500 crore to ensure that the Public Sector Banks are able to attain a minimum 8 per cent Tier-I capital by March 31, 2011.”

Stocks of the four major public sector banks (state-run not privately-run banks like ICICI) including State Bank of India, Andhra Bank, Canara Bank and Bank of India are all up in early trading today. CDS, on the other hand, are all wider led by State Bank of India out 5% to 170 basis points (unlike in yesterday’s action which saw the Korean bank stocks down and CDS wider)

Once again New York markets have not opened yet and the impact on the privately-run banks such as ICICI Bank (IBN), HDFC Bank (HDB) and IDBI Bank is not yet clear but based on early trading of both CDS and stocks in Indian markets, the privately-run banks appear to be following the lead and direction of the public-sector banks. The stocks are mostly up while the CDS are mostly wider. IDBI Bank CDS, for example, is also up 5% to 175 basis points.

Like most of the European banks that have seen their CDS widen significantly over the month as the Greek financial crisis has continued, Indian banks have also seen their CDS rise significantly. Both IDBI’s and State Bank of India’s CDS traded around 100 basis points in mid-January before embarking on the 70-plus percent rise that has taken them to current levels.