Indices post biggest jump in 7 weeks on banking stocks rally, global cues

Sensex gains 996 points as banking stocks rally

The benchmark indices posted their biggest single-day gain since April 7, thanks to a huge spurt in banking stocks and supportive global cues. The Sensex gained 996 points, or 3.25 per cent, to end at 31,605, while the Nifty50 rose 286 points, or 3.2 per cent, to close at 9,315.

The banking sector gauges BSE Bankex and Bank Nifty surged more than 7 per cent.

Despite overnight gains on Wall Street, the benchmark indices began the session in the red, but saw unprecedented buying in the last couple of hours of trade with several large banking stocks soaring more than 10 per cent each.

The latest spurt in banking stocks follows huge underperformance in the last three weeks. Until Friday, the Bankex was down nearly 20 per cent month-to-date. In comparison, the benchmark Sensex was down 9 per cent during the same period.

Market players said banking stocks were in the “oversold territory” and some buying triggered short-covering, leading to a huge spike in prices. Markets players said traders were nervous to carry forward their short positions because of the expiry of the May series derivatives contracts on Thursday.

“Positive global cues rubbed on to the Indian markets and led to the gains in banking and finance stocks. And that led to short-covering. Fundam-entally, there is no reason for the markets to go up like this. We have a flare-up along the India-China border; the number of Covid-19 cases is still going up,” said Ambareesh Baliga, an independent market analyst. “If there is no follow-up buying tomorrow (Thursday), all those who covered their shorts will take fresh short positions. It’s more of a technical move,” he added.

The top eight Sensex gainers were financial stocks. Axis Bank gained the most (13.5 per cent), followed by ICICI Bank (9 per cent), and HDFC Bank (6 per cent).

Ajit Mishra, VP-research, Religare Broking, said global cues led to a positive start, which strengthened as the day progressed. “Further, news of easing of restrictions and the gradual reopening of economies across the world raised investors’ hope of the economy getting back on track.”

“Though we’re seeing reopening of the economy in phases, it would be tough to translate that into business amid the rising number of Covid-19 cases and the migrant issues,” Mishra said.

Most global markets gained between 1 per cent and 3 per cent on Wednesday. India was among the best-performing market. However, Wednesday’s performance comes on the back of huge underperformance this month. Until Friday, India was the only major global market to post double-digit losses in dollar terms in May.

Financial stocks, including banks, have the biggest weighting on the benchmark indices. Many attribute the weak performance of banks as the biggest reason for India’s underperformance against the global markets this month.

Investors have been wary of banking stocks on fears that the grim economic outlook will hurt financial institutions the most.

“In the wake of a historic output loss followed by potentially a prolonged (long bottom) economic recovery during FY21-22, we further downgrade our (banking) sector view. We now move closer to a stress case scenario in FY21-22 as we expect the current economic situation will drive paradigm changes in the sector in the near to medium term. More than just the growth slowdown, we are now on the verge of a new (and unique) NPA cycle panning across the corporate and retail segments lasting through at least FY21-22,” Bank of America Securities had said in a note earlier this month, where it downgraded top banking stocks.