WPI inflation falls to 5.05 per cent

CPI inflation has been declining and recently touched a 2-year low. WPI inflation has also fallen sharply to 5.05 per cent.

This leaves room for the RBI to cut rates in the second half of the year, which may push banking stocks higher.

Lesser concerns on non performing assets

Gross and net non performing assets (NPAs) at banks may have peaked as results from some banks show. They are not getting very bad and some banks have shown an improvement in asset quality this quarter. As recovery in NPAs takes place, bank stocks are likely to shoot up. 

Economy related stocks may rise

Should a Narendra Modi led NDA government take charge at the centre, banking stocks are likely to rally faster than the defensive stocks like IT and Pharma. The belief that Narendra Modi would push economic growth through policy initiatives, should first boost banking shares.  

Cheap valuations

Most of the banking stocks are trading at very cheap levels. For example, PSU banks are trading at price to book value of 0.50 times with dividend yields as high as 7 per cent in certain cases. A good private sector bank like Yes Bank is trading at a P/E of barely 6 times.

Economic growth to boost banking sector

Things may have bottomed out for the economy and if there is a turnaround the first stocks to bounce back would be the banking stocks. Hence, it's best to stay invested in these set of stocks.