Why did the PSU banking stocks rally so sharply on Tuesday?

That is correct, the PSU banks was a star performer with the PSU banking index up almost over 2% on an otherwise tepid day. PSU banking stocks rallied more than 2% with most of the banks including the front line PSU banking names like BOB, BOI, Canara Bank, UCO Bank and Union Bank rallied anywhere between 2% and 5% on Tuesday. This has been one of the best single day performanecs by the PSU banks and it must be remembered that the PSU banks were among the star performers in the market for the month of July also.

The reasons are not far to seek. In most PSU banks, the profit growth has been robust in the June quarter due to lower levels of loan loss provisioning. Markets are also impressed by the sharp fall in gross NPAs across PSU banks and the Net NPAs indicating at loan losses substantially provided for. One more factor favouring the PSU banks is that they have also been gaining from a rising share of CASA (current and savings accounts) deposits in the overall deposit mix, being low cost. Earnings would get a boost from low credit costs.