The Sensex and Nifty rose on Thursday tracking gains in global peers, but Punjab National Bank slumped for a second consecutive session to its lowest in nearly four months after it unearthed fraudulent transactions of around $1.77 billion.
Asian stocks gained on Thursday after Wall Street brushed aside strong U.S. inflation data and surged, in a move that also saw the dollar pinned at two-week lows even as Treasury yields jumped in anticipation of more rapid U.S. interest rate hikes.
However, Punjab National Bank, India's second-largest state-run lender with assets of $120 billion, dropped as much as 8.6 percent to its lowest since Oct. 24, after slumping around 10 percent in the previous session when the lender said it had detected fraudulent transactions at a Mumbai branch.
Although some lenders broadly recovered from losses, analysts warned that other banks could have also been impacted by PNB transactions and this could continue to weigh on the market.
Given the scale of the fraud, the fallout from this case could spread and give rise to fresh questions about lending procedures at Indian lenders, particularly public sector banks, mired in soured debt.
"Concerns around banks after the PNB incident are expected to linger for some time, and it has dampened the sentiment," said Siddharth Sedani, Vice President - Head Equity Advisory, Anand Rathi.
The Nifty was up 0.45 percent at 10,545.75, as of 0805 GMT.
The Sensex gained 0.43 percent to 34,307.80.
The Nifty Bank index was trading 0.4 percent higher.
The Nifty PSU bank index dropped 0.5 percent, after falling nearly five percent in the previous session, following the central bank's announcement of tough rules for loan restructuring.