NewsStocksPSU banks attractive investment opportunity with cleaned balance sheets, says Raamdeo AgrawalPSU banks attractive investment opportunity with cleaned balance sheets, says Raamdeo Agrawal
Raamdeo Agrawal of Motilal Oswal Financial Services views PSU banks as attractive investments due to cleaned balance sheets, professional management, and resolution of 2008-2020 legacy issues. He expects credit growth to create economic multiplier effects and highlights India's domestic demand strength comprising 70-80% of the economy. Recent market corrections reflect excessive post-2020 valuations, while FII returns depend on earnings acceleration or valuation moderation from current 25x premium over emerging markets.
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Raamdeo Agrawal, Chairman and Co-Founder of Motilal Oswal Financial Services, has identified India's public sector banks as among the most attractive investment opportunities in the current market environment. Speaking to ET Now, Agrawal emphasized that the fundamental problems that plagued PSU banks between 2008 and 2020 have been largely resolved, creating compelling investment prospects.
PSU Banks Transformation and Investment Appeal
Agrawal highlighted the significant transformation in PSU banks' operational framework and financial health. The banks have cleaned up their balance sheets, eliminated directed lending practices, and adopted professional management structures with strong technological capabilities, particularly among larger institutions. He noted that leadership transitions in PSU banks often proceed more smoothly compared to private lenders that rely heavily on long-tenured, charismatic CEOs.
| Key PSU Banking Advantages: | Details |
|---|---|
| Balance Sheet Status: | Cleaned up from legacy issues |
| Management Structure: | Professional and technology-driven |
| Valuation Appeal: | Cheaper compared to private peers |
| Lending Practices: | No directed lending anymore |
| Standout Pick: | State Bank of India |
Among PSU banks, Agrawal specifically mentioned State Bank of India as particularly attractive for investors seeking exposure to this sector.
Credit Growth and Economic Multiplier Effects
The market expert anticipates that falling interest rates combined with rising credit growth could trigger significant multiplier effects across the Indian economy. This economic momentum is expected to begin with rate-sensitive sectors such as housing before gradually expanding to broader consumption patterns. Agrawal explained that housing sector growth typically leads to increased demand for plumbing, furnishing, labor, and eventually drives broader consumption trends, creating a domino effect that builds momentum quarter after quarter.
Domestic Demand Strength Amid Global Uncertainties
While acknowledging global trade uncertainties and the shift from multilateral trade towards bilateral and self-reliant policies, Agrawal emphasized India's fundamental strength in domestic demand. The domestic market accounts for approximately 70-80% of India's economy, providing significant insulation from global trade disruptions. He noted that the government has multiple tools to boost purchasing power, including lower taxes, cheaper credit, and policy support measures that can be expanded in upcoming budgets.
Market Corrections and Valuation Reset
Agrawal attributed recent market corrections to excessive valuations that accumulated during the post-2020 liquidity boom and retail investor surge. He observed that stocks growing at 40-50% but priced at 100-200 times earnings face inevitable disappointment when growth moderates to still-healthy levels of 20-25%. The correction reflects pricing excess rather than fundamental business deterioration, as investors often confuse momentum-driven speculation with genuine long-term investing.
| Market Dynamics: | Current Status |
|---|---|
| India Valuation Multiple: | ~25 times earnings |
| Other Emerging Markets: | ~15 times earnings |
| Market Level Support: | Around 26,000 despite heavy selling |
| Domestic Flow Strength: | Retail and institutional support |
FII Return Conditions and Earnings Outlook
Regarding foreign institutional investor flows, Agrawal believes meaningful FII returns are unlikely until India's valuation premium narrows or earnings growth accelerates significantly. With India trading at approximately 25 times earnings compared to 15 times in other emerging markets, the country has become a funding source for global investors. He identified two potential catalysts for reversing this trend: either a sharp market correction or robust earnings growth at 20% over the next year, which would automatically moderate valuations and attract FII interest.
Agrawal maintains a bullish outlook on earnings growth over the next 12 months, driven by improving credit growth and strong domestic demand fundamentals, while emphasizing that long-term investment success requires discipline and realistic expectations about company growth rates and appropriate pricing.
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