The liquidity squeeze and the tight monetary policy followed in the past few quarters have affected the banking sector and hence banking sector stocks adversely.
Rising non performing assets and lower net interest margins have been a cause for concern, particularly with public sector banks, most of which had hit their 52 week lows in December., 2011
The CRR cut is now expected to ease liquidity conditions and paves the way for a repo rate cut. This would improve the net interest margins and lower the non performing assets of banks, signalling better times for the banking sector as a whole.
Banking stocks are hence expected to rally on the hopes that the monetary easing has begun.