Bank shares in focus ahead of borrowing schedule

MUMBAI: Bank shares are seen in focus in the shortened trading week ahead, as investors eye the Reserve Bank of India’s (RBI) announcement of the government’s borrowing timetable for April to September on Monday.

The borrowing schedule does not have a direct impact on equities, but will determine the direction of the government bond market, where banks, especially the state-owned, are significant investors.

More than the borrowing plans, investors are awaiting comments from the central bank on how much would it absorb the supply of government paper in the market. Higher supply of paper will drive down bond prices, which is detrimental to the bond portfolios of banks, as they rely on profits from appreciation of securities.

“PSU bank stocks behave as ‘bond-proxies’,” said broking firm IDFC-SSKI, which has turned bullish on these shares because it doesn’t expect government bond prices to fall further. Yields on the 10-year benchmark bond have risen over 3% in over a year to 8%. Bond prices and yields move in opposite direction.



“The best time to play government bonds is when RBI is actually borrowing, as it puts all its might behind maintaining stability in the bond market,” IDFC-SSKI said, in a report. “Also, inflation is set to moderate, with food prices stabilising over the past month led by prospects of a bountiful rabi season as also on a high base (coming into play April-10 onwards),” it said.

But some fund managers expect weakness in banking shares till the central bank’s monetary policy meeting on April 20, where the central bank is expected to raise policy rates further. In the week prior to last, RBI raised rates to combat inflation.

“Bank stocks could see a rebound only once inflation starts showing signs of mellowing. That has not happened yet,” said a chief investment officer with a mutual fund, owned by a foreign firm.

Though the market last week was indifferent to the central bank’s move, brokers said the undertone is nervous on concern more rate hikes could increase borrowing costs for companies and consumers, further delaying stronger economic growth. Last week, the Sensex rose less than 0.5% over the previous close. Financial markets will be closed on Good Friday.