Banking stocks fell sharply in trade since the beginning of the week after markets plunged following a devaluation of the Yuan by Chinese authorities.

Banking stocks were the worst hit with shares of several PSU banking stocks sliding following a dismal set of results from State Bank of India.

1) RBI May cut interest rates

But, in the GST melee many analysts did not give enough attention to the sharp fall in the CPI Inflation to 3.78 per cent for the month of July stunning most economists.

In the past 18 months CPI inflation has halved. This is likely to compel the Reserve Bank of India to cut CRR (interest rates) outside of its policy meet scheduled in Sept. Read what is CRR here

The large cap banking stocks maybe a good bet if you are looking to buy stocks. Amongst these would be the likes of ICICI Bank, State Bank of India, Bank of Baroda and Canara Bank.

2) NPAs may have peaked

The other reason to buy banking stocks maybe that non performing asset quality worries may have peaked as can be seen from the host of banks, particularly from the PSU banks that have reported numbers.

3) IIP numbers suggest economic recovery

The IIP numbers that were reported for June came in much better than expected and there is a possibility that greenshoots of economic recovery maybe emerging. If that happens banks would be the biggest beneficiaries and hence accumulating quality banking shares at the current levels is not a bad idea. They are a great proxy for economic recovery.

4) PSU Banks to be recapitalized

If you look at some of the PSU banking shares they are mostly way below their book values. These banks are also going to be recapitalised by the government. Apart from this the dividend yield on some of these banks is exceptional, making them ideal picks.

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