Banking stocks have emerged as among the strongest performers in the market over the past week after the Reserve Bank of India’s (RBI) measures to boost foreign currency inflows raised expectations of stronger deposit mobilisation, improved liquidity and better earnings prospects for lenders.
The Bank Nifty has gained 5.8% since the RBI announced the measures on June 5, outperforming the Nifty’s 3.16% rise during the same period. The central bank’s package, including regulatory relaxations for foreign currency non-resident bank (FCNR(B)) deposits, is expected to attract $50-60 billion in inflows, according to analysts.
Investor sentiment has also been supported by banking system credit growth rising to a two-year high of 17.65%.
Christy B Mathai, Fund Manager (Equity) at Quantum Mutual Fund, said the RBI’s FCNR(B) measures have improved sentiment around the sector by easing concerns over funding costs and net interest margins (NIMs). Banks had been concerned that elevated bulk deposit rates, along with uncertainty arising from geopolitical tensions, could delay the expected recovery in margins.
“The FCNR measures have revived hopes that banks will be able to raise deposits without adding pressure on funding costs, helping bridge the credit-deposit gap while supporting margins,” he said. He added that the exemption of incremental FCNR(B) deposits from CRR and SLR requirements would provide banks greater flexibility to deploy funds for lending.
Mathai said the recent decline in crude oil prices has also reduced macroeconomic concerns, while banks have not reported any significant deterioration in asset quality despite geopolitical risks. Large private sector lenders have already built contingency provisions to cushion against potential stress, he added.
Shridatta Bhandwaldar, Chief Investment Officer–Equities at Canara Robeco Asset Management, said the RBI’s measures, along with easing geopolitical concerns, are expected to support liquidity in the banking system and keep bulk deposit rates under control.
He said the sector’s outlook had already started improving as credit growth accelerated over the past two quarters, while concerns over NIMs have largely eased and credit costs remain benign.
“We are constructive on financials because credit growth is coming back, asset quality remains healthy and valuations are attractive from an 18-24 month perspective,” he said.
Bhandwaldar added that foreign institutional investor selling had impacted private sector banks more than public sector lenders due to higher foreign ownership. However, given current valuations and the earnings outlook, he said he prefers private sector banks and expects the sector to perform well if the earnings recovery continues.
The combined market capitalisation of banking stocks rose by Rs 2.75 lakh crore to Rs 53.9 lakh crore since June 8. Shares of the top five banks by market capitalisation gained 4-8% during the same period.