Outcry in the stock market! Indian banks embezzled $95 billion, foreign investors pulled out; What big danger is looming?

These days the banking sector is going through huge pressure in the Indian stock market. Within the last few weeks, the shares of Indian banks have fallen so much that their market value has decreased by about 95 billion dollars. Market experts fear that this crisis may deepen further in the coming days. If you also invest in the stock market, then it is very important for you to understand why this earthquake has suddenly occurred in the strong banking sector of the country and what effect it can have on your portfolio.

Why are bank shares falling? What is the role of RBI?

There are many big reasons behind this huge decline, the most important role of which is considered to be the recent steps of the Reserve Bank of India (RBI). In fact, to save the Indian rupee from falling to a record low, the RBI is continuously selling dollars in the market. This step has stabilized the rupee to some extent, but the ability of banks to inject liquidity into the banking system has reduced significantly. Financial conditions are already tight in the market, which is likely to have a direct impact on the profits of banks. Apart from this, due to the ongoing war and tension in the Middle East, the pace of debt recovery in India may also slow down, which will directly put a brake on the loan growth of banks.

Foreign investors withdrew record money

Rapid selling by foreign investors (FIIs) also played a big role in this tsunami in banking shares. According to the latest data, in the first 15 days of March alone, foreign investors have withdrawn a record Rs 327 billion (about $3.5 billion) from shares of financial companies. The situation is that since the beginning of March, Bank Nifty has fallen by 95 billion dollars and it has narrowly escaped from going into bear market (a situation with a huge fall of 20% or more).

Why is there a big threat looming over the market?

According to a Bloomberg report, India’s total stock market is worth about $ 4.5 trillion and bank shares alone account for about one-third of it. In such a situation, if this period of weakness in banking shares continues, it can have a devastating impact on the entire stock market. This situation is also scary because the Indian market has already been included in the list of most falling markets of the year 2023.

Is there still a ray of hope?

Amidst all this bad news and selling, some financial experts are also seeing a ray of hope. Kranti Bathini, Equity Strategist, Wealthmills Securities, says that even though there will be pressure on bank stocks in the coming time due to strict monetary policy, but after this huge fall, the valuation of bank stocks is now becoming quite attractive for investors.

Currently, Bank Nifty is trading at 1.5 times one-year forward ‘price-to-book’, which is its lowest level since 2020. Many brokerage firms are positive on strong long-term economic growth. Citibank has started giving more preference to private sector banks than public sector banks (PSU Banks), because it believes that private banks can withstand the current difficulties and economic shocks in a better way.

What are the big challenges and threats ahead?

Expressing concern about future challenges, Jefferies has quoted Bloomberg as saying that due to RBI rules, banks may have to suffer huge losses of about Rs 50 billion in their currency trades. Apart from this, global rating agency ‘Fitch Ratings’ estimates that due to tight financial conditions, the Net Interest Margin (NIM) of banks may reduce by 20 to 30 basis points, which will dent their profits. At the same time, Rajat Aggarwal, Asia Strategist of Societe Generale, believes that it will be very interesting to see how much impact the war in the Middle East will have on the recent increase in credit growth.