Urjit Patel’s Continuation Of Banking Reforms Is Key For Markets

The banking sector has been at the forefront since this rally began with the Bank Nifty delivering stellar returns of 39.2 per cent post budget.

All the constituents of the major banking index have been firing. Private sector banks are surging due a retail credit expansion, while PSU bank stocks due to an ongoing balance sheet clean-up.

Hence, the appointment of Urjit Patel as the next Governor of the RBI comes as a pleasant surprise. A continuation in credit policy and banking sector reforms is a key to sustaining the momentum in the markets over the coming years.

One of the highlights Raghuram Rajan’s tenure has been instituting a monetary policy framework and initiating a clean-up in PSU bank balance sheets. And Urjit Patel was instrumental in framing this monetary policy. A panel headed by him was the basis of the agreement between the government and the RBI on “inflation targeting.”

Stock markets prefer stability and continuity, and on the RBI front the government is clearly walking the talk.

Besides, the Indian markets are seeing a change in domestic investor sentiments. For some time now, domestic investors were on the fence pulling out money from stocks. But over the last week, domestic investors have been gradually reducing their intensity of selling, and even turned positive buying stocks over Rs 100 crore on Friday.

With domestic investors changing track, and foreign investors continuing to pour in money having purchased stocks worth Rs 1,256.9 crore last week, Indian markets seem to be headed for new heights this year.

Talking of surprises, investors will be watching the upcoming US elections. Any negative news on that front could change sentiments in the medium term. Besides, it’s widely expected that the US Fed will hold on to its stance on raising rates till after the US elections is done.

And now with the appointment of Urjit Patel as the RBI Governor another part that could have surprised the market is out of the way. Now for the next three months at least, stable and continued policies both on the external and internal front will have a positive bearing on stock market sentiments.

Hence, investors could continue to invest in the banking sector. Despite the good returns the sector has delivered the last few months, the banking story still has a lot of room for growth in the coming years.

Investors should continue to add mid-caps on the dips. Companies in this sector are finally wriggling out of a gut-wrenching slowdown that squeezed their working capital and profitability. However, as most stocks have run up too fast, investors will have to tread carefully in this space. Here valuations are vital to warrant further investments.

Among the constituents of the frontline indices, metals are also gaining ground. Some metal stocks like Tata Steel have done fairly well over the past few weeks.

One segment that has been weighing the markets down is technology. Tech companies are grappling with changing business models as cloud-based computing has been gaining strength. Revenue growth in the IT sector is a cause of concern. And a consolidation here may be on the cards.

A consolidation is ongoing in the markets. As stocks have surged considerably, earnings will have to catch up now. Once this is over, markets will begin to march ahead again.

The re-entry of domestic investors is being considered a good sign. Hence, the mantra continues to remain that of buying on dips. Investors should continue to make SIP-like investments in mid-caps and frontline stocks. And, in the next few months, take further exposure to banking stocks – on corrections, of course.