Banking stocks rallied sharply on Friday after the US Federal Reserve decided to keep interest rate hikes on hold in its FOMC Meet.

There are many reasons why banking stocks will rally in India in the coming weeks. Here are a few reasons:

1. RBI To Reduce Interest Rates On Sept 29

With WPI inflation coming in at a historic low and CPI inflation well below the RBI's target of 6 per cent, there's absolutely no doubt that the country's central bank would cut interest rates.

In fact, the CPI Inflation at just 3.76 per cent is way below the RBI's target. Analysts are betting on an interest rate cut of at least 50 basis month until March 31, 2016. This should augur well for banking stocks.

2. Economic recovery gathering pace

The government's thrust on boosting expenditure in infrastructure is likely to see economic recovery gathering pace. So far the GDP number at 7% for the quarter ending March 31, 2015 has been way below estimates.

However, it is likely that the pace of reforms will gather steam, which should augur well for the banking sector.

3. NPAs may have peaked

Non performing assets (NPAs) in the banking sector may have peaked. Investors are betting on the possibility of an improved NPA when banks report their quarterly numbers for the quarter ending Sept 30, 2015.

4. Private banks may become foreign owned

Recently, there were reports in the Economic Times that private banks may become fully foreign owned if the proposal to accept overseas investment in the sector to 100 per cent is accepted. Now, one cannot be sure of this kind of information and one would have to wait and watch.

All in all banking stocks have several positives which can see a substantial rally in these stocks. Gains of around 20 per cent in these stocks from the current levels in the next one year cannot be ruled out.

Over the last six months banking stocks have been badly hit, including the private sector banks. Some of the banks are almost 25 per cent lower than the peaks seen in the month of March. This makes them relatively attractive bets, if one has a 1-2 year investment perspective in mind. One can add these stocks to the portfolio if there is a further decline.

Look for banking stocks that have better control over non performing assets, inclduig the public sector banking stocks.

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