Right after RBI trimmed the key repo rate by 50 basis points, surprising the market and experts, buying in banking stocks heightened on June 6. So far, Bank Nifty has climbed by nearly 840 points, with heavyweight stocks like HDFC Bank, Kotak Bank, Axis Bank, ICICI Bank and SBI driving the index. The 50 bps rate cut is expected to bolster the growth of the banking sector in the long term; however, experts also predict near-term margin pressure.
Bank Nifty:
At the time of writing, Bank Nifty traded at 56,557.10, higher by 796.25 points or 1.43%. The index climbed as much as 836.6 points to hit an intraday high of 56,597.45 right after RBI's policy outcomes. The index had opened lower at 55,699.45 from its previous day's print of 55,760.85.
Investors are optimistic in banking stocks as RBI's rate cut will boost their credit growth. But they shrugged off the impact on deposits.
IDFC First Bank emerged as the star performer with a 5.3% upside, while Axis Bank and AU Small Finance Bank rallied by 3.2% and 2.2%. Kotak Bank, Bank of Baroda, SBI, and Federal Bank surged by 1% to 1.5%.
Gains were also seen in stocks like PNB, IndusInd Bank, and ICICI Bank, However, Canara Bank was the only stock that dipped by 0.7%.
Nifty Private Bank outperformed with upside of nearly 2%, while Nifty PSU Bank gained by nearly 0.5%.
"The RBI's decision to cut rates by 50bps came as a surprise against our expectations of a third consecutive 25bps rate cut. The regulator is in favour of front-loading rate cuts to support growth. However, the RBI has changed its stance from Accommodative to Neutral. This provides limited scope for further rate cuts. However, softening inflation trends which are expected to remain within or broadly below the tolerance limit and a likely demand recovery can be viewed as positive," said Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS.
RBI reduced the repo rate by 50 basis points to 5.5% on June 6, while changing its monetary policy stance to 'Neutral' from 'Accommodative'.
The repo rate is the lending benchmark, at which, banks borrow money from RBI for liquidity sustainability. The rate cut will also impact banks lending and FD rates to customers.
A rate cut means EMIs will go down because banks will reduce interest rates on term loans. However, a rate cut also means customers will get lesser return on their FDs since banks have linked their fixed deposits to repo rate.
The system-level financial parameters of Scheduled Commercial Banks (SCBs) continue to be robust, said RBI governor Sanjay Malhotra on June 6.
Malhotra added, " The asset quality parameters, liquidity buffers and profitability parameters have shown further improvement. Credit Deposit ratio for the banking system at the end of December 2024 was at 81.84 per cent, broadly similar to a year ago. Similarly, the system-level parameters of NBFCs too are sound with comfortable capital position and improved GNPA ratios."
Going ahead, Malhotra said, "The stress witnessed earlier in retail segments like unsecured personal loans and credit card receivables portfolio has abated, while the stress in micro-finance segment is persisting. Banks and NBFCs active in these segments are already recalibrating their business models, strengthening their credit underwriting practices and stepping up their collection efforts to avoid any excessive build-up of risks on this front in future."
How RBI's repo rate cut will impact banks growth?
From a banking sector perspective, Kulkarni's note said, the pick-up in credit growth which has been subdued as banks exit FY25 remains pivotal. Hopes are pinned on a possible recovery in H2FY26 supported by falling interest rates, expectations of a strong monsoon, consumption boost from the tax rate cut and potential recovery in demand for the unsecured segments as stress subsides.
"We see tailwinds for NIMs given the improving systemic liquidity and the deposit rate cuts taken by most banks. However, even as H1FY26 will see a more pronounced impact of the rate cut on NIMs, some respite is expected over H2FY26. Asset Quality concern appears to be steadily waning with unsecured segment stress showing gradual signs of stability, while the secured segment asset quality continues to hold up well," Axis Securities expert added.
Along the similar lines, Dr. VK Vijayakumar, Chief Investment Strategist, Geojit Investments added, " This big rate cut will impact the margins of the banks and, therefore, bank stocks will be under pressure in the near-term. However, the credit growth that this rate cut will hopefully stimulate will compensate for the dip in margins."
Which Banking Stocks To Prefer?
At present, Axis Securities expert said, "we would prefer banks with promising growth prospects, healthy deposit franchises, stable asset quality metrics and strong and steady management teams. We continue to prefer the larger private banks and our picks would be HDFC Bank, ICICI Bank and Kotak Bank amongst the larger private banks and City Union Bank amongst the mid-sized banks."
Disclaimer: The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.
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