Nifty Bank Index has decreased in Private Sector Banks

The portion of private sector banks in the Nifty Bank index has decreased as their stocks have been trading lower compared to the previous year. In contrast, stocks of public sector banks have experienced a significant surge during this period, leading to an increase in their weightage in the index.

Several factors contribute to this distinct trading pattern in banking stocks. Public sector banks benefit from better access to low-cost deposits due to a larger base of savers and an extensive network. This enables them to maintain lower costs for their funds. Conversely, private sector banks face challenges in attracting deposits, forcing them to increase deposit rates and rely on the wholesale market where the cost of funds is higher. This adversely affects their net interest margins, which represent the interest earned on borrowed funds minus the interest paid for them.

Furthermore, the perception of public sector banks has improved, influenced by a positive outlook on public sector undertakings as a whole.