According to a report in the Deccan Herald (DH), mutual funds invested Rs 1911 crore in State Bank of India, Rs 1446 crores in HDFC Bank and Rs 1047 crores in ICICI Bank for Q4 ending March 31, 2014. The DH report quoted Capitaline Data.

Not only mutual funds, but, foreign funds and individuals all seem to be chasing banking stocks.

Why are mutual funds betting on banking stocks?

For the last one year banking stocks have been languishing. Non performing assets have been one of the worst in the last one year, particularly from the PSU banking space. The Reserve Bank of India has hiked interest rate in the last one year, to battle inflation. On the other hand it made some unfavorable policy changes like increasing MSF requirement last year, before reducing the same later.

But, the banking sector has clearly been one of the favorites in the last three months. The one reason why these stocks are rallying is hopes that Narendra Modi would form the next government at the centre, reversing the poor investment climate that we are seeing currently.

Fund managers are hopeful that growth would gather momentum and when that happens the banking sector would see higher credit growth and lower non performing assets.

Also, there is a hope that as inflation falls, the RBI would cut interest rates, which should augur well for the banking sector.

It's important to remember that all of the outcomes, must hold true, as banking stocks have rallied largely on hopes. In fact, it is more of a hope rally than anything else.

Stocks like ICICI Bank and HDFC Bank have only recently hit their 52-week highs, on the back of huge fund flows into these stocks.

If interest rates do not fall, Narendra Modi does not become the Prime Minister or growth in the economy does not accelerate, stocks from the sector may see a sharp fall.

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