The Indian stock market experienced a great volatility in the year 2007-08 and banks led this volatility. This study looks at the performance of banking stocks vis-a-vis S&P CNX Nifty in the period commencing from July 1, 2007 to June 30, 2008. For this purpose, the Bank Nifty was taken for comparing the banking sector with benchmark S&P CNX Nifty. For carrying out the study, Market Adjusted Abnormal Return (MAAR) on weekly basis was applied to know the relative performance of the banking stocks and applied t-test for the analysis. For a better understanding, the abnormal returns generated by the public and private sector banks are compared separately. The results were substantiated with the news analysis.

The foremost challenge to the Indian banking industry today, is to cater to the needs and demands of the emergent economy while consistently meeting regularity requirements and maintaining the trust amongst investor fraternity. Following the exponential growth which got started way back in 1991 after liberalization initiatives in the country, the Indian banking sector witnessed accelerated growth during 2006-07.

In the last two calendar years (2005-07), Indian share market has witnessed remarkable growth due to irrational bullishness. Some critics are of the opinion that this momentum will not be sustained in the time of global downturn in general and the US sluggishness in particular. The Indian stock market saw a bull run in 2007. The market experienced a big rally in the second half of 2007. Though the global factors were the major areas of concern leading to this sluggishness, the Indian market paid least attention to it and continued moving upwards. Fundamentally, corporate earnings slowed down in the second half of 2007, when at the same time the market was overvalued. The technical analysts projected a target of 27,000 for sensex by the end of the year 2008. But, the first half of 2008 broke all the misconceptions of the market. The market shattered as if there had been no support for it. On July 2, 2007, S&P CNX Nifty was 4,313.75; it reached a peak of 6,357.1 on January 8, 2008 and fell back to the level of 4,021.7 on June 30, 2008. It meant the market was back to square one.

The banking sector, one of the most attractive sectors till the end of the year 2007, has now emerged as the least attractive sector for investment. We can precisely identify disparity in pricing of Indian banking stocks with industry-specific global events. Conventionally, it is viewed that stock market quickly incorporates the global and domestic industry news into the stock price and establishes a new equilibrium level. But, we have identified that in the year 2007 and 2008, the Indian banking stocks responded very late after the emergence of financial crisis in the US stock market. This elucidates that it is difficult to keep oneself isolated from the global market.

Bank Management Journal, Indian Stock Market, Banking Sectors, Private Sector Banks, Indian Banking Industry, Financial Crisis, Global Market, Indian Banking Stocks, Commercial Banks, Equity Market Development, Credit Markets, Macroeconomic Implications, Subprime Crisis, Financial Market.