The shares of several public sector banks, including SBI, PNB, Bank of Baroda and others have sharply fallen from their record highs which they had hit in January-February this year, as the raging US-Iran war, weakening rupee and other factors dampened sentiment.
The Nifty PSU Bank index has fallen over 17% after hitting a fresh 52-week high of 9,919 in February this year. SBI, Bank of Baroda, Union Bank of India, Punjab National Bank (PNB) and other stocks tumbled around 17-21% from their record highs hit earlier this year.
The Reserve Bank of India (RBI) on Friday announced a slew of measures to ease foreign investments in government securities. India scrapped the long-term capital gains tax on investments by foreign institutional investors (FIIs) in government securities through an ordinance issued on Friday. RBI Governor Sanjay Malhotra also unveiled a series of measures to boost FPI investments, including expanding the Fully Accessible Route (FAR) to cover new issuances of 15-, 30- and 40-year government bonds.
Also read: India makes big moves to attract foreign investments in bonds. How will this impact stock market?
Should you buy PSU bank stocks now?
Overall, the steps taken by RBI to attract foreign capital augurs well for the banking sector, including PSU banks, said Sunny Agrawal, Head of Fundamental Research at SBI Securities. He highlighted that stability in dollar-rupee and inflow of funds in bond markets augurs well for banking, as the narrative of rate hike is on the back burner.
"Since the hedging cost on FCNR deposits will be borne by the RBI and are exempt from CRR/SLR requirement, margins of the banking sector shouldn't be under pressure due to mobilisation of these deposits," the analyst explained.
Harshal Dasani, Business Head at INVasset PMS however said that RBI’s currency-support measures are positive, but they do not change the cycle overnight. The message is clear, that the central bank wants to attract foreign capital and stabilise the rupee without using interest rates as a blunt tool. This helps because calmer currency markets usually mean less stress in bond yields, better treasury sentiment and lower macro uncertainty, the analyst said.
RBI's moves not blanket bullish signal for every PSU bank
“But this is not a blanket bullish signal for every PSU bank. The tone of policy is still cautious because crude, dollar strength and foreign flows remain live risks, he further said, adding that the better approach within PSU banks is to stay with quality rather than chase beta.
"The preference should be for banks with a strong deposit franchise, high CASA base, comfortable capital adequacy, cleaner provision cover and diversified loan growth. In this phase, the largest and best-capitalised PSU franchises look better placed than weaker names that are moving only because liquidity has improved. If the rupee stabilises and bond yields soften, PSU banks could see tactical support, but durable rerating will still depend on credit costs, deposit growth and margin discipline. This is a market where balance-sheet strength deserves a premium over headline momentum,” according to Dasani.
Within the PSU basket, Agrawal explained that banks with large foreign exposure like Bank of Baroda, Bank of India, Canara Bank and PNB can be key beneficiaries in the short to medium term. “Our top picks within PSBs are Bank of Maharashtra, Indian Bank, J&K Bank and Bank of Baroda,” he added.
