Shares in private banks fell early on Monday, as traders turned cautious on the sector following the government's decision to impose restrictions on Global Trust Bank.
Banking shares recovered slightly, however, on news that GTB would be taken over by Oriental Bank of Commerce.
At the weekend, the government froze all but essential operations of the 10-year-old GTB for up to three months.
GTB shares fell the maximum permissible 20 per cent to Rs 10.54. The biggest private bank, ICICI Bank was one per cent lower at Rs 258 and HDFC Bank the second-biggest private bank, had lost 0.5 per cent to Rs 367.
"This should be a temporary reaction," said K.K. Mittal, a New Delhi-based fund manager with Escorts Mutual Fund. "But the worry is that such actions could be initiated against other weak private banks."
"But I don't see any reason to cut exposure to the banking sector at this stage. There could be a shift of money to the state-run banks," said Mittal, whose fund is underweight on the sector.
A CLSA report released last week showed influential foreign funds were the Indian financial sector's biggest stakeholders with 22.1 per cent, compared with 14 per cent of India's overall equity market. Traders worry financial stocks could come under pressure if the funds decide to cut exposure to the sector.
