Periwal’s fund holds lenders such as HDFC Bank Ltd., ICICI Bank Ltd. and Axis Bank Ltd., which have all surged at least 10% this year, compared with an 8% rise in the benchmark NSE Nifty 50 Index.

The Nifty Bank Index hit a fresh record on July 1 after gaining for four straight months, while the NSE Nifty India Consumption Index has advanced 16% since its March low, marginally outperforming the broader gauge. Upbeat first-quarter business updates by companies such as pizzamaker Jubilant Foodworks Ltd. and jeweler Kalyan Jewellers India Ltd. signal room for more gains. 

Most of the credit for the rally goes to the Reserve Bank of India — it has injected more than $100 billion of liquidity into the market this year, and its 50 basis points interest-rate cut last month came as a surprise to the market.

“RBI’s easing is helping bank stocks to outperform and other rate sensitives will also come around to participate in the rally,” said Sumeet Rohra, a fund manager at Smartsun. “The easing lowers the cost of funds and boosts earnings per share and return on investment which overall leads to rerating of valuations.”

India’s stock market remains expensive. The broader equity benchmark trades at about 21 times of its one-year forward consensus earnings estimate, compared with about 13 times for the MSCI Emerging Markets Index, according to data compiled by Bloomberg. A shift in RBI’s policy stance to neutral also indicates the room for future rate cuts may be limited.

But historical data supports the sense of optimism. The last two times the RBI slashed the rates by half-a-percentage point, in April 2012 and September 2015, the banking gauge beat the benchmark index over the subsequent 12 months. After a 75- basis-points cut during the pandemic in March 2020 both the gauges gave similar gains. 

The RBI’s measures “are steps in the right direction to boost growth, which could be reflected on the ground in the second half of the year,” said Rita Tahilramani, a Singapore-based investment director at Aberdeen. “We are taking the opportunity in this correction to buy” stocks across sectors, she said.