Examining the Drivers of Stock Prices of Private Sector Banks in India

Abstract

Indian private sector banking stocks have been rebounding from a massive selloff. Private sector banks which have traditionally maintained their asset quality and profitability when compared to their public-sector counterparts, have recently seen their asset quality erode. Given that private sector banks play an influential role in the Indian economy, it would be helpful to understand the key drivers of private bank stock prices. This paper studied the influence of some key micro and macro determinants on the stock prices of all listed private sector banks in India over the 12 years from 2008-2019. Panel regression models were fit to study the relationship between the variables. Liquidity, profitability, growth, inflation and exchange rate indicators proved to be important influencers of the stock prices of private sector banks in India. The study provides evidence for the Fisher effect suggesting that private bank stocks can provide good inflation adjusted returns over time. Stakeholders of these banks can focus on these determinants which will contribute to shareholder value over time.

Keywords: Indian Private Banks, Stock Market capitalization, Liquidity, Exchange rates, GDP, Panel regression

DOI: 10.7176/EJBM/13-11-04

Publication date:June 30^th 2021