FIIs pull out ₹6,200 crore from financials but CIOs say banks could be India’s next big largecap trade

Foreign investors are selling the very sector that could determine the next move in India’s largecap market. Financial services saw net FII outflows of ₹6,204 crore in the fortnight ended September 15, the sharpest selloff among all sectors. The reversal was significant as the sector had attracted ₹10,494 crore in August.

Yet two mutual fund chief investment officers argue that the selling may be creating, rather than closing, the next major largecap opportunity.

“Banks in particular look like they're at some of the best valuations we've seen, specifically large private banks,” Rishi Kohli, chief investment officer at JioBlackRock Mutual Fund, told ET Markets. “Private banks now look considerably more attractive.”


Alok Singh, CIO at Bank of India Mutual Fund, is also constructive on the sector. He said banks have low non-performing assets, decent return on assets, improving return on equity and loan growth — the fundamental conditions typically required for a re-rating.

The disconnect is becoming harder to ignore. Financial stocks have become cheaper since the previous quarter without a commensurate deterioration in the underlying business, Singh said. The market’s hesitation, in his view, has been driven largely by concerns over net interest margins, liquidity and possible rate moves.

“Business-wise, most banks are doing well and have gotten cheaper since last quarter without the market reacting but that can't continue indefinitely if the trend persists,” Singh said.

The latest FII data shows that the selling was not limited to financials. Foreign investors were net sellers across 13 of the 24 sectors shown in NSDL data. Automobile and auto components saw outflows of ₹2,670 crore, followed by oil, gas and consumable fuels at ₹2,385 crore, FMCG at ₹2,029 crore, power at ₹1,653 crore, telecom at ₹991 crore and IT at ₹960 crore.

The broad-based selling pushed the combined net flow across the sectors shown to roughly ₹14,116 crore of outflows in the latest fortnight.

Also Read |Bank of India MF CIO Alok Singh sees banks poised for a re-rating. Here’s what could trigger it

Healthcare was the biggest recipient of foreign money, attracting ₹2,114 crore. Construction and services followed with inflows of ₹930 crore and ₹905 crore, respectively. Consumer services received ₹422 crore, while chemicals saw net buying of ₹228 crore.

The financial services selloff also marks a sharp shift in positioning. FIIs had bought ₹14,634 crore into the sector in the period ended June 30. They remained net buyers in the following fortnight, before turning sellers in the second half of July. Buying returned in August, but the latest outflow was much larger than the earlier bouts of selling.

For Singh, the liquidity argument is being overstated. He pointed to the Reserve Bank of India’s repeated efforts to absorb excess liquidity and said a recent ₹7 lakh crore reverse repo operation attracted limited takers.

“If liquidity were truly excessive and suppressing NIMs long-term, banks wouldn't be holding it back from RBI — any reasonable treasury head would rather place it with RBI than sit on it,” Singh said.

That suggests the pressure may be temporary rather than structural, he said. Short-term rates could dip to 2%–3% for a few weeks, but that would not necessarily translate into permanent pressure on bank margins.

“So banking should be another sector that does well,” Singh said.

Kohli’s argument is based more on relative valuation and global positioning. Indian banks have underperformed global banks, across emerging and developed markets, by between 35% and 100% over the past two years, depending on the benchmark, he said.

That underperformance appears difficult to justify, according to Kohli, given that Indian banks trade at lower price-to-earnings multiples, lower PEG ratios relative to their growth expectations and return on equity levels comparable with stronger emerging-market banks.

“That gap is the kind of setup that eventually draws long-only and hedge fund flows rotating out of global and EM banks into better Indian names,” Kohli said.

The distinction between public sector and private sector banks is also becoming more important. PSU banks have already seen a significant re-rating after their growth improved and legacy non-performing asset concerns eased. Kohli believes that trade has now matured, while private-bank growth is beginning to pick up again.

“PSU banks have had their run and aren't looking bad, but private banks now look considerably more attractive,” he said.

The sector’s importance extends beyond individual stock selection. Banks have a large weight in India’s benchmark indices, meaning even a modest rotation into large private banks could have an outsized impact on the Nifty and other large-cap benchmarks.

Large-cap performance has so far been held back by weakness in IT and the lack of meaningful support from banks, Singh said. While IT remains difficult, a recovery in banks and a few other index heavyweights could improve the broader market’s performance.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)