Several banking stocks, including HDFC Bank, ICICI Bank and SBI, traded with healthy gains on Wednesday, December 4, fuelled by hopes of supportive monetary policy from the Reserve Bank of India (RBI) after recent macroeconomic data signalled a slowdown in India’s growth momentum.
The entire financial space is teeming with positivity. In intraday trade on Wednesday, the Nifty Bank and Private Bank index rose almost 1 per cent each, while the PSU Bank index clocked a gain of almost 1.5 per cent. The Nifty Financial Services index rose over a per cent.
Financial stocks are rising as the market expects a CRR (cash reserve ratio) cut this Friday, which will boost their profitability.
What is driving banking stocks higher?
The Nifty Bank index has been in the green since last Friday as expectations are rife that the RBI will announce policy measures to support economic growth, which has shown signs of weakness.
India’s Q2FY25 GDP growth was 5.4 per cent, the lowest in nearly two years and the third consecutive quarter of decline.
India’s central bank is expected to cut CRR to inject liquidity into the banking system and boost lending. This will have a positive impact on the profitability of financial firms.
Aamar Deo Singh, Senior Vice President of Research at Angel One, believes banks would benefit from a reduction in the CRR, which is now at 4.5 per cent. This would boost their flexible resources and, thus, their profitability.
Abhishek Pandya, a research analyst at Stoxbox, pointed out that the Nifty Bank has risen by 6 per cent over the last eight trading sessions, indicating strong bullish momentum. This increase is largely attributed to the anticipation that the Reserve Bank of India will reduce the Cash Reserve Ratio (CRR) by 25 bps from the current rate of 4.50 per cent to 4.25 per cent.
“This immediate rate cut in CRR is expected to enhance liquidity in the market,” said Pandya.
Pandya underscored that Q2 results have shown that overall credit growth has declined to 12- 13 per cent, down from 17- 18 per cent. A reduction in the CRR could help stimulate credit growth again.
According to Atul Parakh, CEO of Bigul, the rally in banking stocks could be led by strong credit growth, declining NPAs, positive corporate earnings trends, potential interest rate cuts, seasonal demand boosts, and foreign investment inflows.
Parakh believes the banks may remain optimistic about continuing this trend, provided they can maintain their credit growth momentum and profitability levels.
The RBI’s Monetary Policy Committee (MPC) meeting began on Wednesday, December 4, and the policy decision will be announced on Friday, December 6.
Some experts expect a 25 bps rate cut from the RBI after the Q2 GDP shock. If it materialises, it will significantly boost rate-sensitive banking stocks.
While the RBI factor is underpinning the entire financial space, the PSU banking space is being driven by an additional factor- the upcoming Union Budget 2025.
According to Anshul Jain, Head of Research at Lakshmishree Investment and Securities, PSU bank stocks are rising due to the rate cut buzz expected from the RBI MPC meeting. The market expects a 25 bps rate cut from the RBI Governor Shaktikanta Das-led monetary committee. Besides, PSU stocks are under the radar of Dalal Street bulls ahead of the upcoming Union Budget 2025.
“PSU and infra stocks become bullish in December and remain positive until the Budget is presented,” said Jain.
Banking stocks to buy
Mint consulted several experts for their top picks from the sector. Here’s what they said:
Abhishek Pandya, Research Analyst, Stoxbox
“In a cycle characterised by declining credit growth and significant asset quality concerns, HDFC Bank, ICICI Bank, and SBI emerge as standout choices for medium to long-term investment perspectives,” said Pandya.
Vikas Jain, Head of Research at Reliance Securities
“Among key stocks, we like SBI, Union Bank, Canara Bank, and RBL Bank from current levels,” said Jain.
Ajit Mishra, SVP of research at Religare Broking
“We recommend adopting a selective approach within the banking sector despite the recent strong performance of the banking index. Among private banks, HDFC Bank, Federal Bank, and ICICI Bank appear promising, while State Bank of India (SBI) and Bank of Baroda stand out in the PSU segment due to their relative strength,” said Mishra.
Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.
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