Indian bank stocks have plummeted by $95 billion since March; central bank's foreign exchange controls may further pressure the stock market.

Analysts say that as the Reserve Bank of India tightens its controls over rupee transactions, along with higher energy prices weighing on earnings prospects, Indian bank stocks may face further declines.

Jefferies estimates that, as a result of guidance from the Reserve Bank of India, banks’ closing out of foreign-exchange trades could suffer losses of up to 50 billion rupees ($537M).

Data from the National Securities Depository Limited of India shows that in just the first two weeks of March, global investors withdrew 327 billion rupees from stocks of financial services companies, setting a record. Since the beginning of March, the Nifty Bank Index’s market value has already evaporated by $95 billion, barely avoiding a technical bear market.

Kranthi Bathini, an equity strategist at WealthMills Securities, said, “With monetary policy likely to remain tight, these stocks may face additional pressure in the medium to short term.”

This matters for the outlook of India’s equity market, which is worth $4.5 trillion, because bank stocks account for nearly one-third of the benchmark stock index. If bank stocks continue to weaken, they could drag down the overall stock market. India’s stock market is down 13% so far this year, making it one of Asia’s worst-performing markets.

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