Bank Nifty at 20-month high; MSCI rejig drives FII buying

MUMBAI: Bank shares rose to their highest in 20 months on Tuesday as foreign investors bought them amid the rebalancing of MSCI indices.

The Bank Nifty rose 2.73% to close at 20,426.20 — the highest since January 28, 2015 — on Tuesday. The index is 129 points away from its peak of 20,555, touched on January 27.

“The rally is probably on account of the recent MSCI increasing its weightage on a couple of bank stocks,” said Mahesh Patil, CIO, Birla AMC. “This has led to buying by active and passive FII funds.”

Axis Bank and Yes Bank were among the banks that saw an increase in weightage. Many global mutual funds follow the MSCI indices.

Therefore, an addition or deletion of a stock or change in its weightage on the index leads global funds tracking the index to make adjustments to their portfolio.

Axis soared 6.1% and Yes Bank gained 3.9% on Tuesday. Analysts said the purchases had a rub-off effect on the rest of the sector. ICICI Bank gained 4.3%.

They added the recent decline in bond yields has also aided the rally in bank stocks, mainly public sector banks. Though expectations of an immediate rate cut have been dashed following the appointment of Urjit Patel as RBI governor, bond yields have weakened since the mid-June announcement of Raghuram Rajan’s exit from the central bank.

The new benchmark yield on Monday fell four basis points to close at 6.92%, pushing prices up. Patel is known for his anti-inflation stance.

“Some traders are punting over low inflation once the fear of Fed rate hike abated,” said Soumyajit Niyogi, associate director at India Ratings and Research. “This, too, has sent the yield lower with limited stock float.”

Citibank, in its latest report, said the consumer inflation is expected to come down to 5% in August. The brokerage said if this happens there could be a rate cut around the corner.“A 5% August CPI print will open up the possibility of a 25-bps cut in the October 4 policy,” said Samiran Chakraborty and Anurag Jha, economists at Citi in a client note. “This means the “upside risks” envisaged by the RBI to their March’17 CPI target will be substantially diminished.”

The brokerage, however, cautioned that sticky core inflation, disruption during FCNR(B) outflow and the response function of the RBI under the new Governor remain risks to its rate cut view.