The Bank Nifty has dragged the overall market down in the past few sessions. In the past five sessions, the Nifty has lost about one per cent, while the Bank Nifty has lost two per cent. Since the beginning of March, the Nifty has lost 4.5 per cent, while the Bank Nifty has lost eight per cent.

The banking sector has always been high-beta with respect to the Nifty (it shows greater movement in the same direction). Banks also have a big influence on the Nifty since the eight banks included in it have a combined weight of 24 per cent.

Five of the eight banks listed in the Nifty are private and three are public sector banks (PSBs). Due to the free float methodology, private banks have a disproportionately higher weight of 20 per cent. HDFC Bank and ICICI Bank have the same weight of about 6.6 per cent, while Axis Bank (3.4 per cent), Kotak Mahindra (1.97 per cent) and IndusInd (1.3 per cent) have lower weights. The PSBs, State Bank of India (SBI) (three per cent), Bank of Baroda (0.6 per cent) and Punjab National Bank (PNB) (0.4 per cent), contribute only four per cent. Seven of the bank stocks are high-beta with respect to the Nifty. The sole exception is Kotak Mahindra at 0.99.

The Bank Nifty Index has 12 stocks. This includes the eight listed in the Nifty plus Bank of India, Canara Bank, Federal Bank and YES Bank. HDFC Bank and ICICI Bank have 25.7 per cent weight each and Axis Bank has a weight of 13.3 per cent, with SBI fourth at 12 per cent. The Bank Nifty has a one-year beta of 1.4 and a PE of 20-plus.

There is a dedicated PSB Bank index as well. This contains 12 PSB stocks. The index weight is overwhelmingly in three stocks, which contribute 80 per cent. SBI has a weight of 57.3 per cent, Bank of Baroda has 12 per cent and PNB has 9.7 per cent. The PSB index has fallen eight per cent in the last month and 3.5 per cent in the past week. It has a PE of 13.5 and a one-year beta of 1.7 with respect to the Nifty.

There is a clear pattern. The PSBs have clearly underperformed and there is also a major difference in terms of valuations. Among PSBs, Bank of India, Syndicate Bank, SBI and Allahabad Bank have been among the worst performers.

The Reserve Bank of India has started cutting policy rates and could cut more given that inflation appears under control. That should be good for all banks. The next RBI policy review would be on April 7.

Meantime, the Securities and Exchange Board of India and RBI have decided to ease the norms for converting bad debt into equity. This could offer hope if NPAs could be converted to equity, giving lenders management control and this was followed by selling the company.

A downtrend seems established. There could be short-covering this week but the sector could continue to see a downtrend after the settlement. The next news trigger for an uptrend would be hopes of something good, such as another rate cut on April 7, followed by the possibility of better earnings in Q4. If there are no positives, there is a chance that the financial index could drift down further.

A pullback could take the Bank Nifty up to 19,500 before it hits serious resistance – that would be a recovery of six per cent. A further, fall on the other hand, could take it down another 1,000 points to the 17,200-17,400 zone. This is likely to be an exceedingly volatile sector and is likely to set the agenda for the broader market.

The author is a technical and equity analyst