Sellers targeted shares of both private and public sector banks Tuesday amid the market mayhem resulting from currency related turmoil globally.
The Bank Nifty was the worst performer among sectoral indices, crashing 543 points to close at 17,830.55.
Dealers attributed the slide to unwinding of derivative positions as well as offloading by momentum players among FIIs, who would have piled on to these stocks when prices were shooting up.
They said profit taking was inevitable considering the dazzling run bank shares have had so far this calendar.
The Bank Nifty itself has risen over 60 percent this year, as of yesterday.
Shares of private sector banks like DCB Bank , Yes Bank, IndusInd Bank, Axis Bank, Kotak Mahindra Bank, City Union Bank, Federal Bank, Karur Vysya Bank and ICICI Bank have risen 57-102 percent this year.
And for all the concerns about non-performing assets, state-owned banks like SBI, Punjab National Bank, Indian Bank, Bank of Baroda, Union Bank, Central Bank of India and Canara Bank have risen 5-76 per cent.
Many investors are bullish on the banking sector as they feel it is the best way to play an impending economic recovery and softening of interest rates.
A healthy economy is expected to boost demand for loans while lower interest rates will lower the probability of defaults as well as help recover some of the bad loans.
“The two themes which we have been talking about is recovery in GDP growth over a period of time and economic activity and second, lower interest rates,” Sanjeev Parsad of Kotak Securities had said in an interview to CNBC-TV18 on Monday.
“The two sectors which we have been very overweight are auto and banking. We continue to have a large portion of the portfolio, 50 percent of the portfolio in auto and banking names which play well on these two themes,” he said.
And yet, signals from the economy continue to be mixed. Industrial production for October contracted 4.2 percent, raising concerns among economists and investors, even as some analysts say it was an aberration cause by one-off factors.
And while business sentiment has improved, credit offtake has been tepid as many stall projects are still facing regulatory and raw material hurdles. Also, many companies are still saddled with huge debt, and are first looking to reduce their loans before making fresh investments.
Lastly, there is also the lure of cheaper foreign capital.
“We expect Indian corporates to increasingly access the offshore debt capital markets for their funding requirements,” rating agency Fitch said last week, adding, “the growth is likely to be driven by the need to refinance debt and fund capex once the investment cycle restarts.”
The sudden pressure on the rupee could temporarily deter corporates from taking on too much foreign loans. But the key to profitability for Indian banks will be a solid revival in the investment cycle.