Lower than expected inflation data and expectation that the RBI would finally warm up to a rate cut in its forthcoming policy review led to a rally in banking stocks on Friday. The Sensex too snapped a five-day losing streak to close at 19,318, up 88 points or 0.46 per cent.

The BSE banking index ‘BSE Bankex’ closed at 14,265, up almost 179 points or 1.27 per cent from its previous close. Union Bank, Bank of Baroda and IndusInd Bank were the top three gainers; Union Bank closed at Rs 266.10, up 4.05 per cent, from its previous close.

Inflation declined to 7.24 per cent in November mainly on account of lower prices of vegetables, giving a cue to the RBI to consider interest rate cut next week to promote sagging growth. The softer than expected inflation data comes close on the heels of an improvement in the Index of Industrial Production data for October earlier this week at 8.2 per cent, signalling an upside in infrastructure output and investment compared to earlier periods.

According to Vaibhav Aggarwal, Banking Analyst, Angel Broking, the market is expecting a CRR cut of 25 bps in the policy review to be announced on Tuesday.

“Banking stocks rallied on Friday owing to lower inflation figures and sentiment that RBI could go in for a CRR cut. Overall, tier-two banks are witnessing investors’ interest as they are not too expensive right now. These are high beta cyclical stocks and will continue to outperform the benchmarks Nifty and Sensex as long as the market performs well.”

“In the short-term, we are bullish on banking sector but in the long-term, it is more dynamic and depends on how the parameters of inflation and rate of interest pan out,” he added.

>manisha.jha@thehindu.co.in

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