PSU banks extend gain after government cuts H1 borrowing

Nifty PSU Bank index up 3% on Tuesday, extending its previous day's 5% rally on the National Stock Exchange.

Shares of public sector banks were trading higher for the second straight day with the Nifty PSU Bank index gaining more than 3% on Tuesday, extending its previous day’s 5% rally, after the government announced lower-than-expected borrowing programme for the first half of the financial year 2018-19 (FY19).

At 01:43 pm; Nifty PSU Bank index, the largest gainer among sectoral indices, was up 3.12% at 2,939 as compared to 0.61% rise in the Nifty 50 index. The PSU bank index hit a high of 2,948 in early morning trade, rallied 8.5% in past two trading sessions from level of 2,716 on Friday.

Punjab National Bank (PNB), Corporation Bank, IDBI Bank, Union Bank of India and Bank of Maharashtra were up more than 4%, while State Bank of India, Bank of Baroda, Punjab National Bank, Oriental Bank of Commerce, Uco Bank, Dena Bank and Indian Overseas Bank up in the range of 2% to 4% on the BSE.

ICICI Bank, Kotak Mahindra Bank and Axis Bank from the private sector banks and PNB Housing Finance, Cholamandalam Investment and Finance Company, Mahindra & Mahindra Financial Services, LIC Housing Finance, Dewan Housing Finance Corporation and GIC Housing Finance from the financials were up between 1% and 5%.

The Centre said it would borrow Rs 2.88 trillion in April-September 2018-19 (H1FY19), against market expectation of Rs 3.3-3.6 trillion. The weekly borrowing size would also be Rs 120 billion, against the usual Rs 150-180 billion, a great relief for the markets. CLICK HERE TO READ FULL REPORT

Yields in the market have softened on Tuesday by about 20-25 bps and while equilibrium will be reached at a higher level, the yields are likely to be below the 7.62% 10-year benchmark rate on Monday. Expected lower supply of paper in the market pushes up prices and lowers yields, which is what has been buffered in by the market.

Lower yields will be good for banks as it comes at a time when the investment portfolio needs to be valued at the end of the year and the MTM outcome could be positive this time unlike in December when yields had increased, CARE Ratings said in a note.