Rajan sets tone for short-term rally in banks

Has Raghuram Rajan, the newly-appointed Reserve Bank of India (RBI) governor, set the tone for a short-term rally in bank shares? Some traders on Dalal Street feel so after Rajan’s inspiring speech on Wednesday when he took charge of the country’s monetary authority.

Fund managers and analysts said heightened hopes of the RBI governor introducing some innovative measures to improve the health of the country’s banking system could spark short covering in banks in the near-term.

“It is not fresh buying that could drive up banks. Its covering of shorts (positions) that would push up stocks because of the sheer size of these bets,” said Siddarth Bhamre, head-derivatives, Angel Broking.

Traders had rolled over bearish bets in futures contracts of bank index and individual stocks to the Spetember series when the August series expired last Thursday. Though banks have been battered in recent months, analysts have been hesitant to conclude that the worst was over for the sector on uncertainty about how long the downturn would last.

So far in 2013, BSE’s Bank index has fallen 30% compared to the 4% drop in the Sensex.

Amid such concerns, Rajan is seen in the financial markets as someone who can spark a revival in sentiment. But, the likely rebound in both banks and the broader market could be temporary.

“The recovery would last for a day or two because FIIs still remain bearish on the market,” said Bhamre.

The next key trigger for bank shares would be the outcome of Rajan’s first monetary policy statement on September 20.