Decoding the surge: Analysing the meteoric rise of Nifty PSU Bank index since 2022

However, from November 2020 onwards, well-informed investors began to harbor the belief that the worst for the PSU Banking sector was finally behind, and the future held promise. Over the next 14 months, the Nifty PSUBANK index witnessed a remarkable rally, surging over 130%, ascending from 1260 in October 2020 to 3000 in January 2022.

Nevertheless, this substantial rally seemed diminutive when compared to the all-time high of 5376 in November 2010, which had plummeted to 1078 in May 2020 before rebounding to 3000 in January 2022. Despite the impressive rally exceeding 130%, it recouped just 45% of the “fall” from an all-time high of 5376, leaving investors perplexed about the index's future direction.

Consequently, the market remained predominantly in consolidation over the next few months before eventually trending northward. This time, market participants exuded greater confidence as bad loans were seen on a decline. The index signaled a breakout from the falling channel on the monthly chart, indicating heightened bullish sentiment in the PSU banking space, triggering a further rally. Retail traders had already begun to enter the PSU space by then.

The Big rally

The initial two months of 2023 bucked the larger trend in the PSU Banking space, witnessing a sharp correction in after months of continuous rally. Nonetheless, the prevailing sentiment in the market continued to echo "Buy" and "Buy on dips" for PSU Banks. By October 2023, the index achieved a new all-time high. Since then, a new wave has swept through the PSU space, with stocks in the sector exhibiting unparalleled strength in the last six months. Robust buying activity in PSU Banking stocks propelled the index to new highs each month for the past few months.

Road ahead

Despite the remarkable rally over the last 6-7 months, the sector has not exhibited significant signs of reversal; the larger trend continues to remain bullish. However, following this unprecedented surge, the space appears somewhat overstretched, and the potential for correction or consolidation cannot be dismissed. Although the long-term, as well as the mid-term trend, remains positive, adopting a theme of buying on dips might be advisable in a general sense for the sector. Nevertheless, adopting a stock-specific approach may prove prudent in the current scenario.

(Rupak De is Senior Technical Analyst at LKP Securities. Views are own)