July and August were particularly tough for banking stocks as the RBI unexpectedly took measures to squeeze liquidity from the system, leading to a sharp spike in yields. Ten-year government bond yields rose about 127 bps to 8.736% at the end of September from 7.463% at the end of June. The BSE Bankex index slid 17% in the quarter.
“Banking stocks underperformed in the second quarter due to a variety of reasons such as the sharp spike in bond yields as well the concerns on restructured assets, mounting NPAs and increased cost of borrowing,” said Sadanand Shetty, VP & senior fund manager, equity, Taurus MF.
Fund houses have been reducing their exposure to banking stocks in the past few months. According to Morningstar India, the average allocation of diversified equity funds to the banking sector fell to about 21% at the end of August from 25.7% at the end of June. Infra funds continued their poor showing during the September quarter with returns of -7.5%.
Infra funds are the worst performers in the last one year, with average category returns of -14%. Although these funds typically invest in sectors such as infrastructure, capital goods, engineering and, to some extent energy and utilities, they also have a significant exposure to banking stocks.
“Infra funds have a large exposure to banking stocks, which further impacted the performance of these funds in the quarter. The RBI rate hike during the quarter was also a negative,” said Shetty.
The slide in the Indian rupee helped technology funds emerge as outperformers, with returns of over 20%. The rupee slid about 5% against the dollar in the quarter. The BSE Teck and BSE IT indices gained 20% and 25% in the September quarter. “Technology stocks have seen earnings upgrades in last 2-3 quarters; the rupee depreciation has also acted as tailwind,” said Shetty.