Short-term investors advised to keep stop loss of 31,800 and target of 34,400 for Bank Nifty; here's why

Indian financial system is bank-dominated and therefore a key pillar of the economy, this sector is instrumental for the economy. This sector’s health can also be used to gauge the state of economy to a large extent.

Banking sector is very highly correlated to the economy as a whole and, therefore, it would mimic the effect on the broader markets. This sector having major weightage in the NIFTY50 also makes it quite important and the exposure here can be significant.

The past year has been quite eventful for the banks as the RBI has been maintaining an expansionary monetary policy - banks had to withstand the moratorium effect. Reducing NPAs and the positive quarterly results kept this sector in limelight.

According to the Reserve Bank of India's weekly statistical supplement published on May 7, 2021, Indian bank loans increased by 5.7 percent from a year ago in the two weeks ending April 23, while deposits increased by 10.3 percent. Over the same time, outstanding loans decreased by Rs 28,039 crore to Rs 10,860 crore. Non-food credit decreased by Rs 36,674 crore to Rs 10,802 crore, while food credit increased by Rs 8,636 crore.

In order to infuse more liquidity into the banks, RBI has decided to come up with a second round of G-Sec buying worth Rs 35,000 crore on May 5, this is a proactive step to maintain liquidity of banks as there may be economic effects owing to the second wave of the pandemic.

The decision of RBI to go for more liquidity for vaccine manufacturers, pharma firms and pathology and hospitals although seems to be a response to the crisis and is a necessary step and which could yield economic benefits to both healthcare/pharma and to banks.

The BankNifty has started bouncing back from the support level since the start of May 2021 and has gradually gained ground and has also fuelled the rally of Nifty50.

Technically, the BankNifty has been taking support at 31,900 and below 33,500 it does not look bullish, the level of 33,500 would be critical and above that the level of 34,000 seems to be the next halt. However, the current economic condition and uncertainty may prove to be hindrance and we could see institutions exiting this space, too, and therefore the level of 33,500 is expected to be crucial.

The outflow of the institutional funds seems to be adding to the nervousness on the Street and the prospect of national lockdown is also not helping, therefore, short to mid-term investors can hold BankNifty with stop loss of 31,800 and target of 34,400.