Sample this: In the last 15 days, bank funds have returned 2.68 per cent. In the last one week, they have returned a good 3.90 per cent, even higher than Sensex returns of 3.65 per cent, according to data from Value Research, a mutual fund research agency. This is a far cry from just six months back, when this sector was being beaten down quite badly.

Said Ajay Bodke, senior fund manager, IDFC [Get Quote] Mutual Fund, "We are moving to an environment where interest rates are expected to come down sharply."

According to him, central banks all over the world are trying to galvanise their economies by introducing aggressive monetary measures and cutting interest rates.

And India is no different. Given that inflation numbers have come back to single-digit levels, there are expectations of further rate cuts.

Added Hemant Rustagi, chief executive officer, Wise Invest Advisors, a mutual fund distribution company,  "The recent reduction is the repo and reverse repo by 100 basis points or 1 per cent to 6.5 and 5 per cent respectively, is likely to increase credit flow into the economy."

Given that Indian economy is expected to grow at 7 per cent, most expect the banking sector to perform better in the days to come.

Addition-ally, the fall in the interest rates means good news for the sector for various reasons. For one, there could be credit off take.

On the other hand, there will be a rise in the values of the gilt and bond portfolios. This would mean their treasury operations are going to be in profits.

No wonder, both fund houses and distributors are aggressively selling these funds. For instance, Rustagi said that he has been recommending these funds for the last two months. "We are bullish about this sector in the medium term," added Bodke.