Correction in PSU bank stocks likely due to higher valuation risks, say analysts

Heavy buying in the banking sector helped broader indices inch towards new heights, countering the subdued beginning of the week characterised by concerns over elevated valuations and higher exchange margin requirements, says Vinod Nair, Head of Research, Geojit Financial Services.

The indices continued their resilient rally, unlike other Asian peers, buoyed by weaker-than-expected inflation data from the US. Investor expectations of a rate cut from the Fed were bolstered as US retail sales data declined. Moreover, a disinflation trend in the eurozone and expectations of increased consumption demand in China after the New Year holidays provided further support, he said.

The Indian auto sector had a strong week, lifted by anticipated high demand and a favourable earnings outlook. PSU Banks, benefiting from improved asset quality and the government’s focus on fiscal prudence, are attracting investors. Large-caps gained traction, with mid and small-caps seeing profit booking, driven by valuation gaps, he added.

Looking ahead, a correction in PSU banks seems likely due to higher valuation risks, he said.

Meanwhile, sectors such as metals, FMCG, and capital goods are anticipated to gain momentum driven by robust construction demand, an order backlog, rural revival prospects, and India's narrowing trade deficit. This is boosted by softer commodity prices and government-led manufacturing initiatives, he said.