Banking stocks demonstrated strong performance on Friday, gaining up to 2% following the RBI's decision to hike the repo rate by 25 basis points to 5.50% - the first rate increase in four years. According to Business Standard, HDFC Bank, State Bank of India (SBI), Federal Bank, Canara Bank, Kotak Mahindra Bank and Punjab National Bank were among the top gainers, rising 2% each on the National Stock Exchange in Friday's intra-day deals. The sector's recovery comes as all 14 Bank Nifty constituents had previously shown signs of improvement, with all 14 constituents trading in green territory on Monday led by Punjab National Bank and AU Small Finance Bank. At 11:18 AM on Friday, the Nifty Bank, Nifty Financial Services, Nifty PSU Bank and Nifty Private Bank indices were up 1.1-1.3%, as compared to a 1.2% rise in the Nifty 50. Federal Bank, Bank of Baroda and ICICI Bank shares were trading in the green with marginal gains, while Nifty Financial Services also moved into the green, with PFC, Bajaj Finance and others gaining up to 2%. Latest data shows the Nifty Bank gained 0.3% while the Nifty Financial Services index rose 0.2%, with Punjab National Bank and Union Bank emerging as top performers, rising around 3% each. Kotak Mahindra Bank was the top gainer among private sector banks on Wednesday, closing 1.88% higher on the NSE, followed by ICICI Bank gaining 1.09% and Federal Bank rising by a similar margin. Among state-owned banks, Union Bank of India was the top gainer with shares rising 2.8%, followed by Punjab National Bank gaining 2.39% and Canara Bank rising 1.13%, while State Bank of India (SBI) declined 0.5%.
The RBI's shift to a tightening cycle reflects rising inflationary pressures and points to further rate increases ahead. According to Business Standard, the Monetary Policy Committee (MPC) unanimously raised the repo rate by 25 bps to 5.50% in its October monetary policy, its first hike since February 2023, and shifted the stance from neutral to "calibrated tightening" as inflation risks from crude, food prices and broader price pressures increased. The RBI's October 2026 meeting underscored that given the current conditions, rate cuts are off the table in the near term and policy action ahead can only be a rate hike or a pause, depending on the evolving conditions and the outlook, as per Lemonn's Gaurav Garg. RBI raised its FY27 GDP growth forecast to 7.1% from 6.7% and CPI inflation forecast to 5.2% from 5.0%, while indicating that near-term policy choices are now between a pause and further hikes rather than rate cuts. Despite the rate increase, RBI Governor Sanjay Malhotra said that credit growth in the system is unlikely to soften a great deal and would continue to be strong going ahead, with credit growing at 18.1% year-on-year while deposits are growing at 17.3% year-on-year. Credit growth is unlikely to see any substantial moderation, citing three key factors: the festive season, resilient corporate demand and the potential shift of foreign currency borrowings, external commercial borrowings (ECBs) and debt market financing towards the banking system.
The latest Q2 FY27 business updates point to continued growth in advances and deposits among several leading lenders. HDFC Bank reported year-on-year deposit growth of 18.8% and advances growth of 16.3%. According to SMC Global Securities's Seema Srivastava, the bank's deposit franchise and relative stability make it a preferred candidate in the current environment. Axis Bank reported advances growth of 22.7% and deposit growth of 20.7%, with its core advances growing 18.8% after excluding FCNR(B)-backed leverage operations, indicating healthy underlying lending momentum. Kotak Mahindra Bank recorded advances growth of 24.7% and deposit growth of 23.2%, though the contribution from FCNR(B) inflows warrants monitoring as investors assess the sustainability and composition of its funding growth. Yes Bank also reported advances growth of 23.8% and deposit growth of 19.5%, while IDBI Bank's total business expanded 18%. In contrast, IndusInd Bank's relatively moderate advances and deposit growth, along with a CASA ratio of 28%, highlights the importance of strengthening its low-cost funding base. Srivastava explained that banking stocks may witness consolidation and selective valuation corrections as investors reassess earnings growth and margin sustainability in a higher-for-longer interest-rate environment.
Kotak Institutional Equities believes the rate hike cycle poses limited risk for banks, given healthy balance sheets, tighter underwriting standards and stronger borrower fundamentals. According to Business Standard, the brokerage firm noted that the structural shift in balance sheets, with increasingly pro-cyclical loan yields supported by fixed-rate deposits, should drive net interest margin (NIM) expansion for banks, especially the large private banks, even if the expected rate cycle is relatively shallow. The large FCNR (B) mobilisation and currently comfortable system liquidity reduce the immediate need for banks to aggressively raise domestic deposit rates, potentially extending the asset-liability repricing benefit. Asset-quality risks remain contained, while frontline private banks are best placed to benefit through NIM expansion, supporting the potential for earnings surprises despite slower loan growth. The sector enters this phase with healthy balance sheets, having already tightened underwriting standards following regulatory concerns around unsecured lending during FY23-24. While rising rate cycles are often viewed with caution given their impact on growth and asset quality, analysts believe the current cycle poses limited risk, historically having a smaller bearing on credit costs than cycles preceded by prolonged domestic credit excesses.
Jefferies India has gone highly bullish on the Indian banks following the RBI's 25 bps rate hike announcement, with the global investment bank believing the rate hike may serve as a catalyst for Indian banks. According to The Economic Times, Jefferies India believes RBI's 25 bps rate hike to 5.5% was on expected lines, but the change in policy stance to calibrated tightening lifts consensus rate-hike expectations to 75-100 bps (from 50 bps). The investment bank noted that the change in stance implies there won't be scope for rate cuts, and we may see tighter liquidity conditions through interventions, leading market rates to rise more than the RBI rate. Jefferies India prefers banking stocks over NBFCs, explaining that Indian banks, especially large private banks, have a higher share of policy-rate-linked loans that reprice over 1-3 months. The brokerage believes that the shift to a "calibrated tightening" stance could turn higher interest rates into an earnings catalyst for Indian banks, with Jefferies estimates that if 75 basis points of rate hikes flow through to yields and banks retain 15% of the benefit, it could lift FY28 earnings. Jefferies now expects the cycle to turn the other way, with banks potentially reporting margin expansion in FY28.
