Why banking stocks are diverging post RBI’s policy announcement

In a surprising turn of events, the performance of banking stocks have taken a notable divergence following the Reserve Bank of India's (RBI) Monetary Policy announcement. While PSU stocks such as State Bank of India (SBI), Bank of Baroda, and Punjab National Bank (PNB) witnessed strong gains on February 8 after the MPC, other public sector banks as well as major private sector players such as Kotak Mahindra Bank, ICICI Bank, and Axis Bank saw a sharp decline.

On February 8, at Rs 699 and Rs 253 SBI and Bank of Baroda were trading three percent higher while the rest of the banking pack was in the red. Why this divergence? Is this reflection of underlying weakness in the sector?

According to Rajesh Palviya, Senior Vice President and Head of Derivative Research at Axis Securities, this deviation is not solely driven by the policy announcement but has roots in previous events, notably the release of HDFC Bank's results. The performance trends post-HDFC Bank's results have put pressure on private banks, while positive sentiments towards PSU banks are gaining traction among investors.

Raj Deepak Singh, Head of Derivative Research at ICICI Securities, pointed out that foreign institutional investors (FIIs) have been selling financial stocks, particularly in the private sector, since January. This selling trend, primarily in banking stocks, intensified after HDFC Bank's results, suggesting a challenging road ahead for private banks in terms of immediate recovery. Two of the biggest private sector banks HDFC Bank and Kotak Bank have been laggards over the past two years as the market has been underwhelmed by the leadership transition in the two banks. What has compounded the problem for HDFC bank is the merger with its parent HDFC and pain in financials as reflected in the last quarter results. In the latest quarter results announced on January 16, HDFC Bank posted disappointing results, which was a shock to investors who dumped the stock dragging the price down 17 percent in four trading sessions.