The market reaction to the Finance Minister’s bank recapitalisation plan announced on Tuesday has been positive.

The BSE’s sensitive index on Wednesday was up 500 points in the morning trade before easing up a bit and ending the day 435 points or 1.33 per cent higher at 33042.50 points. Many top public sector bank stocks saw impressive gains.

The State Bank of India stock moved up 27 per cent to touch ₹324 while the PNB stock rose 46 per cent or about ₹64 to reach ₹201.90. Bank of Baroda was up 31 per cent or ₹45 to reach ₹188.20.

Economists, rating agency analysts and market experts were unanimous in welcoming the recapitalisation plan although the details still remain to be spelt out.

Indranil Sen Gupta, Chief Economist, Bank of America Merrill Lynch, said that the plan will step up loan supply, reduce rates, spur demand, put idle capacity to work and spur investment in two to three years. He said in a note that loan growth could turnaround on sufficient reserve money, another lending rate cut and demonetisation base effects.

He expects the RBI to cut rates by 25 basis points at its December 6 meeting to signal lending rate cuts as the busy industrial season intensifies. He maintains that the recapitalisation plan is a sine qua non for economic recovery.

Srikanth Vadlamani, Vice-President, Moody’s Investor Service, said in a note that the plan was “credit positive” for public sector banks. While pointing out that recapitalisation bonds had been used earlier, he drew attention to the fact that those bonds had long maturities and poor liquidity — and a similar structure this time would be seen as a negative.

Saravana Kumar, CIO, LIC Mutual Fund, while welcoming the recapitalisation plan said in a note: “We could well be in early stages of a new cycle when the excesses of the previous cycle are corrected. Investing in banks/NBFCs with a higher exposure to stressed corporate and infrastructure sectors are likely to see their earnings return to normalised levels in the next one to two years as their provision levels moderate and their operational performance (chastened by their bad loan experience) improves.”

Companies which were badly impacted during the 2008-09 period, when retail non-performing loans spiked due to job losses and an uncertain economic environment, bounced back smartly and investors made healthy returns as their operations improved and earnings normalised.

Kumar expects this to be the likely case for stressed corporate sector banks in the next few years and added that their portfolio construction follows from this strategic outlook.