Public sector banks are positioned to benefit from rate repricing opportunities as the RBI's monetary policy committee is expected to raise interest rates by at least 50 basis points, beginning with a 25-basis-point hike at the October monetary policy meeting, followed by another 25-basis-point increase in December. According to Business Standard, high exposure to repo-linked RAM loans could help public sector banks reprice assets faster than deposits if the RBI raises rates. EBLR loans are mostly linked to the repo rate, and a hike in the repo rate will impact such lending rates immediately, while deposit repricing comes with a lag. This faster repricing of loans can support margins, particularly when deposit costs do not rise at the same pace.
Bank of India Mutual Fund CIO Alok Singh believes Indian banks may be closer to a re-rating than their recent performance suggests. According to reports from The Economic Times, Singh notes that lenders have the fundamentals investors typically look for—low non-performing assets, healthy return on assets and equity, and loan growth—but lingering concerns over net interest margins and FCNR-related liquidity flows have kept the trade from taking off. He expects policy announcements and stronger business numbers to ease these concerns, with public- and private-sector banks being fairly valued and becoming cheaper since the last quarter.
As reported by The Economic Times, Singh observes that the consensus trade just hasn't come through yet, with this disconnect unable to persist indefinitely if the operating trend holds. The CIO notes that public- and private-sector banks are fairly valued and have become cheaper since last quarter, even as their underlying businesses continue to perform well. He emphasizes that the overhang could ease as policy announcements emerge and banks disclose stronger business numbers.
According to Singh's analysis reported by The Economic Times, banks at large should do well despite earlier concerns about NIMs going back to Q4 of last year and current worries about FCNR-related spillover effects. He believes liquidity pressure is not as large as the market anticipates, citing RBI's repeated attempts to remove excess liquidity and noting that any reasonable treasury head would rather place it with the RBI than sit on it. In Q1FY27, domestic NIMs ranged from 2.52 per cent at Canara Bank and BoI to 3.41 per cent at Indian Bank, with SBI at 3 per cent, Central Bank of India at 3.06 per cent, and BoB at 2.93 per cent. Singh also expects capital goods and banking to deliver stronger earnings momentum, while metals look good given demand and government policy with decent capacity utilisation.
Inflation is expected to peak at 6.1 per cent in Q3 FY27, breaching the RBI's upper tolerance band, before easing in Q4. According to Business Standard, India's retail inflation rose to 4.82 per cent in August from 4.45 per cent in July, while economists expect September inflation to track at around 5.5 per cent. The rate-hike cycle is expected to be shallow, with cumulative hikes of 50-75 basis points. However, Singh expects earnings to play a bigger role in shaping the market than further multiple re-rating on a steady-state basis, noting that Q1 earnings were very good, Q2 is also expected to be good, but the concern is Q3 onward—especially in pockets affected by GST and income tax rate cuts.
