Foreign investors divested a massive Rs 60,655 crore from Indian bank stocks in March, a significant portion of their total equity withdrawals. Despite this selloff, analysts now see compelling valuations for long-term investors, with some brokerages upgrading key banking counters. While sectors like auto and construction also saw outflows, IT experienced modest selling, and capital goods attracted buying.

Rs 61,000 crore FII sell-off hits bank stocks. Cheap enough for you to buy now?

Synopsis

Foreign investors divested a massive Rs 60,655 crore from Indian bank stocks in March, a significant portion of their total equity withdrawals. Despite this selloff, analysts now see compelling valuations for long-term investors, with some brokerages upgrading key banking counters. While sectors like auto and construction also saw outflows, IT experienced modest selling, and capital goods attracted buying.

Foreign institutional investors (FIIs) dumped a staggering Rs 60,655 crore worth of bank stocks in March, meaning every second dollar pulled out from Dalal Street came from the financial sector, even as analysts now say valuations have turned compelling enough for long-term investors to step in.

The massive selloff represented more than half of the total Rs 1.18 lakh crore that FIIs withdrew from Indian equities last month, according to NSDL data, making banks and financials the hardest-hit segment in a brutal market rout.

The carnage sent Nifty Bank plunging 17% in March, with Nifty PSU Bank tumbling nearly 20% as the worst performer. Nifty Financial Services fell 15.6% as the broader Nifty crashed over 11%.

But the scale of the damage has now created a buying opportunity, according to top brokerages and market strategists.

"Banking is one segment that is attractively valued now," said Dr V K Vijayakumar, Chief Investment Strategist at Geojit. "Sustained selling by FPIs in leading large private sector banks has made the valuations in the segment attractive. This segment is an excellent long-term buy for investors."

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Jefferies upgraded its overweight rating on banks by adding 3 percentage points to current holdings in SBI, HDFC Bank, and Axis Bank. "COVID-level low valuations for banks, likely limited downside to EPS, and prospects of govt support should help the bank stocks outperform from here," the brokerage said.

What else FIIs are buying & selling

Auto was the second-most sold sector with Rs 12,498 crore in outflows, followed by construction (Rs 9,154 crore), telecom (Rs 5,603 crore), and FMCG (Rs 5,419 crore).

Interestingly, the IT sector, currently the most hated segment amid AI-led disruption fears, saw relatively modest selling of just Rs 1,874 crore. Capital goods bucked the trend with buying of Rs 3,118 crore.

FIIs flee HDFC Bank amid governance crisis

The exodus was particularly severe for HDFC Bank, where FIIs slashed their stake by nearly 4 percentage points during the March quarter, offloading 49.95 crore shares. Foreign holdings in India's largest private lender fell to 44.05% from 47.67% in December, marking the third straight quarter of reductions.

The selling accelerated after former chairman Atanu Chakraborty's shock resignation in mid-March, when he cited "certain happenings and practices within the bank" that were "not in congruence" with his personal values and ethics. The governance crisis triggered regulatory scrutiny and the stock cratered 26% during the quarter. Mutual funds stepped in as buyers, raising their holdings from 26.66% to 29.54%.

PSU banks hit by bond losses

PSU banks bore the brunt of the selloff as a sharp hardening in government security yields materially eroded treasury income. With the 10-year G-Sec yield at around 7% on March 31, up roughly 35 basis points quarter-on-quarter, marked-to-market and realized trading gains likely turned materially lower, particularly for PSU banks carrying larger SLR portfolios, analysts said.

What should investors do?

Ambit Capital moderated its credit growth estimates by 0.5-1.5% for FY26-28 and cut its earnings CAGR forecast to 15.7% from 17.3% earlier. "We believe the recent price correction reflects a possible demand shock and the near-term impact on earnings," the brokerage said. "Though the macro uncertainty can weigh over valuation multiples in the near term, longer-term fundamentals for banks are resilient."

Ambit maintained its preference order of HDFC Bank, ICICI Bank, Axis Bank, and SBI, highlighting HDFC Bank's "superior deposit augmenting capabilities" despite the recent turmoil.

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However, Bank of America struck a more cautious note, downgrading rate-sensitive sectors, including mid-sized private banks, NBFCs, real estate, and passenger vehicles to underweight from overweight earlier.

Vijayakumar said credit growth in the economy continues to be healthy, and the monetary policy committee is unlikely to raise interest rates soon "since inflation arising from supply shocks cannot be addressed through rate hikes."

(Data: Ritesh Presswala)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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