Indian markets had a poor start to 2011. The first week of the year saw the BSE-Sensex lose 4%, even as most other key global markets closed with good gains. India's weakness was largely a result of pressure on auto and banking stocks. While the BSE-Auto index dropped by 7.3%, the BSE-Bankex declined 6.5%.
Let's talk about banking stocks here. The sell-off in these stocks was seemingly a result of the fears of further interest rate hikes by the RBI. India's inflation is not showing any signs of cooling down. Instead the monster is just growing in size. Just last week, food inflation came in higher at 18.3%. This was a sharp 4% higher than the inflation figure that came earlier than this. Vegetables, food grains, fruits, you name it and the prices are surging.
This is adding to the RBI's concerns that stem from rising prices of commodities like crude oil. So there is a general fear that the central bank will announce an interest rate hike sooner than later. An interest rate hike, or a tightened money supply – both go towards reigning in inflation – will have an adverse impact on India Inc. This is especially given that a lot of companies are going for large scale capacity expansion. As such, any further rise in borrowing costs will spoil the party for them.
Another concern that surrounds investors in banking stocks is their valuations. After the rise seen last year, and in face of the current problems, these do not have much headroom to go up from here on. At least the fundamentals do not justify the same. With little upside in margins, banks are expected to rely heavily on their fee income generating abilities in addition to their operating leverage.
Also, most banks envisage higher loan restructuring and provisioning costs in the next financial year (FY12, which starts in March), which may eat into their profits. So, buyers of banking stocks need to be very careful about the choices they make.
For information on how to pick stocks that have the potential to deliver big returns, download our special report now!
Read the latest Market Commentary
What else is happening in the markets today? Dig in...
ONGC share price is trading down by 7% and its current market price is Rs 118. The BSE OIL & GAS is down by 4.0%. The top gainers in the BSE OIL & GAS Index is CASTROL INDIA (up 1.3%). The top losers are ONGC (down 7.1%) and GAIL (down 6.3%).
ULTRATECH CEMENT share price is trading down by 5% and its current market price is Rs 6,487. The BSE 500 is down by 3.4%. The top gainers in the BSE 500 Index are SOUTH IND.BANK (up 10.4%) and JAGRAN PRAKASHAN (up 10.0%). The top losers are ULTRATECH CEMENT (down 5.0%) and BAJAJ FINSERV (down 6.3%).
JAGRAN PRAKASHAN share price is trading up by 10% and its current market price is Rs 60. The BSE 500 is down by 3.2%. The top gainers in the BSE 500 Index are JAGRAN PRAKASHAN (up 10.1%) and RCF (up 11.0%). The top losers are MAHINDRA CIE AUTO. and AJANTA PHARMA (down 0.1%).
UPL share price is trading down by 5% and its current market price is Rs 589. The BSE 500 is down by 3.2%. The top gainers in the BSE 500 Index are RCF (up 11.0%) and SOUTH IND.BANK (up 10.4%). The top losers are UPL (down 5.4%) and BAJAJ FINSERV (down 6.2%).
ICICI LOMBARD GENERAL INSURANCE share price is trading down by 5% and its current market price is Rs 1,479. The BSE 500 is down by 3.2%. The top gainers in the BSE 500 Index are RCF (up 11.0%) and SOUTH IND.BANK (up 10.4%). The top losers are ICICI LOMBARD GENERAL INSURANCE (down 5.2%) and BAJAJ FINSERV (down 6.2%).
The BSE Sensex is trading down by 1,464 points, while the NSE Nifty is trading down by 423 points.
View More Indian Share Market NewsLast time the smallcap index crossed 19k a big correction followed. Here's what makes it different this time.
In this video, I'll cover your queries on intraday trading and also share my view on how to decide stop losses and target prices.
A look at what India's top equity mutual funds bought and sold in January 2021.
Do you enjoy reading Tesla and Bitcoin stories? Here's a not so famous small-cap stock to profit from the rise of EVs.
More
Equitymaster requests your view! Post a comment on "What's ailing banking stocks?". Click here!
Comments are moderated by Equitymaster, in accordance with the Terms of Use, and may not appear
on this article until they have been reviewed and deemed appropriate for posting.
In the meantime, you may want to share this article with your friends!