The Reserve Bank of India (RBI) is slated to announce its monetary policy on Aug 4. Banking stocks have rallied last week and have begun to rally once again today.

Most of these banks saw an improvement in asset quality which has largely pushed banking stocks higher.

RBI may hold interest rates steady

The RBI is likely to hold interest rates steady in its monetary policy on Aug 4. There may be some sentimental reaction to banking stocks if that were to happen, which in all probability will. So, if the RBI holds interest rates steady it would be a good time to buy banking stocks as you may see some rush to sell these stocks.

Why you should be buying banking shares?

Results from ICICI Bank, PNB and Bank of Baroda clearly indicate that the non performing assets of banks have begun to fall. A drop in non performing assets is good news for the banking sector as they have been plagued with asset quality woes for several quarters now.

There are reports that the Ministry may consider reducing interest rates on small saving schemes. Interest rates on government schemes like Sukanya Samridhi and even some of the post office schemes are above bank deposits interest rates. If that continues the move would be from bank deposits to post office small savings schemes.

If interest rates on small savings schemes is reduced people would flock to bank deposits boosting deposits and lending for banks.

One of the other reason for buying shares, especially of PSU Banking shares is that they are clearly under valued. Shares like Syndicate Bank and Canara Bank are trading at 6 times price to earnings multiple. Their price to book value is below 0.50 times, thus offering good value at current levels.

Therefore, irrespective of the Monetary Policy, one can go ahead and buy these stocks.

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