Making money in rising stock markets? Well India’s Central Bank , the RBI, does not see fundamental analysis merit in the stock prices of some stocks. Do you own them?

Profits in stock markets can primarily be made in two ways –technical analysis or fundamental analysis.

The former focuses on the movements of price to look forpatterns that predict a higher probability of future prices on one directionthan the other.

The latter school of thought studies the ground reality ofthe company, its industry and sector, and the economy in general and then seesif the stock of the company being evaluated is over-priced, fairly-priced, or under-priced.

Now, the Indian stock markets have been on an unbelievablerally from the fall the Indian and the global stock  markets took around April last year. Allestimates of a fall in stock prices have been nullified by the accelerating BullRun.

Of all the sectors, one sector has the caught the eye of ShaktikantaDas, the Governor of the Reserve Bank of India. This sector is a heavyweight inthe benchmark indices of the Indian capital markets SENSEX and NIFTY 50.

The sector in question is banks. Non-Performing Assets (NPAs)are a bane of all financial institutions as lending is an integral part of theirbusiness and from those loans; some invariably default or practically have nohope of any recovery. Understandably, NPAs eat a financial institute from theinside and if the ratio passes a threshold, then it may signal an eventual end ofthe company.

It its semi-annual Financial Stability Report, the centralbank observes that the non-performing asset ratio is forecast to rise to 13.5%by the end of September from 7.5% a year ago. 

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The central bank noted, "Domestically, corporatefunding has been cushioned by policy measures and the loan moratorium announcedin the face of the pandemic, but stresses would be visible with a lag."

It further continued, "This has implications for thebanking sector as corporate and banking sector vulnerabilities areinterlinked."

The utterly unexpected and equally devastating pandemicCOVID-19 beat down banks all over the world as the borrowers had difficultypaying back debts. The Indian banks were already weakened by shadow lendingfrauds which spanned two years.

The RBI fulfilled its roles and enacted many measures. As noted,these measures may have delayed the bad-debt issues to surface.

The report continues, "Congenial liquidity andfinancing conditions have shored up the financial parameters of banks, but itis recognised that the available accounting numbers obscure a true recognitionof stress."

Further, "It is in this context that banks must exploitthe congenial financial conditions and the conducive policy environment to planfor capital augmentation and alterations in business models that addressemerging challenges."

It is worth noting that a derivative product based on FinancialServices Index has been launched recently. Also, the Nifty Bank index has risenfrom a low of 16,000 from last year to about 32,000 recently.

Of course, every participant in the capital markets does soat his risk, and this update from RBI provides each one of us with furtherinformation to guide us in our next actions.