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A proxy for leveraging India’s growth story

In terms of economic activity, India’s economy has rebounded smartly to surpass pre-pandemic levels, recording GDP growth of 8.7% for FY 2021-22 after contracting 6.6 % in the previous financial year.

Despite current global inflationary pressures and a volatile macroeconomic environment, India is expected to grow at the fastest rate among the world’s major economies and is well positioned to hit the $5 trillion mark by FY2026- 27. As the country focuses on driving economic growth by improving the competitiveness of the domestic manufacturing sector and undertaking massive infrastructure spending, India’s banking sector will undoubtedly be a key driver for both economic expansion and inclusive growth. In fact, with economic growth and banking requirements being highly intertwined, India’s banking sector is expected to grow in step with the broader economy and record double-digit credit growth rates in the near future.

Despite the devastating impact of the Covid-19 pandemic, India’s banking sector remains adequately capitalized and lower loan loss provisions reflect the health of the broader economy. As domestic demand for financial services improves and credit borrowing from the corporate sector increases, India’s banking sector will experience improved earnings and present an attractive investment opportunity for a savvy investor. However, with India being home to more than 30 public and private sector banks, the task of selecting the right bank stock to invest in can be a daunting task. Investing directly in stocks requires deep knowledge and sector expertise if an investor is looking to take advantage of India’s booming banking sector.

An effective option

It is important to sift through bank stocks to select the biggest, most actively traded and most reputable names in the industry, given that not all banks are positioned to take advantage of the credit opportunities presented by the Indian economy. In this context, investing in the Nifty Bank Index offers investors the opportunity to invest in some of the largest and most liquid bank stocks, carefully selected from all banks currently listed on the National Stock Exchange (NSE). The index is made up of fundamentally strong banking names that meet the country’s banking requirements with an unparalleled track record to date. Comprised of 12 banks, the Nifty Bank Index is currently comprised of public and private sector banks with abundant business liquidity and the largest free-float market capitalization. Companies are selected from the broader Nifty 500 index and factors such as average daily revenue and average daily market capitalization based on data from the previous six months are used to arrive at the final list of banks that make up this index.

The Nifty Bank Index best reflects the capital markets performance of Indian banks and is used to benchmark fund portfolios and launch structured finance products and investment vehicles such as index funds and ETFs. To invest in the Nifty Bank index, investors can opt for an exchange-traded fund (ETF) based on this index. This effectively means that the ETF will mimic the composition of the index and invest in proportion to the weight assigned to each of the 12 banks that make up the index.

The Nifty Bank ETF offers investors the opportunity to invest in some of the best banking names as well as professional portfolio management in line with the semi-annual reshuffle carried out for the base index. Such an ETF can be easily bought or sold by a stock market investor during market hours via his demat account.

The relative underperformance of the banking sector provides investors with a good entry point into the banking ETF, as the banking sector is one of the easiest ways to participate in India’s growth.



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Disclaimer

The opinions expressed above are those of the author.



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