Banking Stocks
Jefferies India turns bullish on banks after RBI's 25 bps repo rate hike
Jefferies India believes the Reserve Bank of India's decision to raise the repo rate by 25 basis points to 5.5% may act as a catalyst for Indian banks. While the rate increase was in line with expectations, the shift in policy stance from 'Neutral' to 'Calibrated Tightening' has lifted consensus expectations for future rate hikes to 75-100 bps, up from the earlier estimate of 50 bps. The change in stance reflects concerns over higher-than-expected inflation and suggests limited scope for rate cuts ahead.
According to Jefferies India, this evolving monetary policy environment could benefit larger private banks, public sector banks, and housing finance companies, as their earnings may see support from rising interest rates. In contrast, smaller private banks, non-banking financial companies, and lenders may face slight risks due to their business models.
The report highlights that banks with a higher proportion of external benchmark-linked loans (EBLR) and stable loan-to-deposit ratios are better positioned to benefit, as their assets reprice quickly—typically within one to three months. Jefferies estimates that if a 75 bps rate hike translates into higher yields and banks retain 15% of the benefit, it could lead to earnings upgrades or help offset pressures from wage hikes or expected credit loss provisions.
Jefferies India also notes that Indian banks have underperformed global peers by 55 percentage points over the past two years, despite global banks benefiting from improved growth and margin trends. The improving rate outlook may help narrow this gap.
Among large-cap banks, Jefferies India has identified ICICI Bank, State Bank of India, and Axis Bank as its top picks, citing their relative strength in a tightening rate environment.
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