India's equity mutual fund managers seem to be reversing their recent buying spree in banks. With the Reserve Bank of India's (RBI) cautious monetary policy outlook dashing hopes of rapid rate cuts during the year, equity funds cut their exposure to banking stocks in February - the first time in six months.
Mutual fund equity schemes' holding in bank shares fell 130 basis points or bps (one basis point is one hundredth of a percentage point). According to the data available from markets regulator Securities and Exchange Board of India (Sebi), overall allocation to banks in February stood at 20.1 per cent against 21.4 per cent in the previous month.
Shares of lenders fell during February with the banking index declining more than the benchmark indices. BSE's Bankex shed 9.45 per cent, while the Sensex declined 5.2 per cent in February. Banking stocks have the highest sector weightage on the Sensex at 25 per cent.
Shares of ICICI Bank and Axis Bank lost between 10 and 13 per cent, while those of state-owned banks - State Bank of India, Bank of Baroda and Punjab National Bank dropped between 13 and 20 per cent.
Swati Kulkarni, executive vice-president and fund manager at UTI Mutual Fund, says, "Outlook for the banking sector depends on revival in perception of inflationary pressures and GDP growth."
According to fund managers, RBI's remark that there is little room for monetary easing has taken the wind out of the shares of lenders. These investors have been hoping that cuts in policy rates would trigger a rally in government securities and boost banks' bond portfolios.
Kaushik Dani, equity head at Peerless Mutual Fund, says, "The market had been anticipating cuts in interest rates for quite some time. Under this anticipation, industry was buying heavily in bank shares. But rates did not move southwards as fast as was anticipated and slight trimming of position on banking stocks followed."
However, fund managers said they cannot take a bearish call on bank shares given their sizeable weightage in the indices. Since assets under management in banks are marked-to-market (using the market value of assets), fall in share prices also contributed in reduction of assets, they said
While cutting holdings in banks, fund managers continued to buy into IT stocks. Exposure in IT sector jumped 124 bps to 10.44 per cent. On the back of revival in US economy, which augurs well for the Indian IT industry, fund managers chose to add fresh position. Whereas on pharmaceuticals and fast moving consumer goods, they remained more or less neutral during the month.