Every stock in the Bank Nifty rose on Thursday as falling oil reduced the chance of another RBI rate increase. For banks, that matters for both loan growth and bond portfolios.
The Nifty Bank index rose 2.51% to 57,316.95 at about 12:30 PM on Thursday, one of the strongest sectors in a broad market rally. All 14 stocks in the index were trading higher.
IndusInd Bank rose 3.72% to ₹897.30. ICICI Bank gained 2.42% to ₹1,458.50 and HDFC Bank 2.35% to ₹754. Axis Bank rose 2.31% and SBI 1.56%. Kotak Mahindra Bank was almost flat, up 0.16%.
Among smaller lenders, Ujjivan Small Finance Bank rose 4.94%, Karnataka Bank 3.57% and DCB Bank 3.05%. Several public sector banks, including Bank of India, Bank of Maharashtra, UCO Bank and Punjab & Sind Bank, rose more than 2%.
Why banks are rallying
The rally was not driven by any banking-specific news. It came from a change in the outlook for interest rates.
The RBI raised its repo rate to 5.50% in October, mainly to contain inflation caused by high oil prices and to support the rupee. Until last week, there was a real risk of another increase in December. Brent was near $118 a barrel, inflation was rising, and the rupee was under pressure.
That has changed sharply. Brent fell almost 9% on Wednesday to about $94.62, after Democrats won both houses of the US Congress and traders bet on a faster end to the Iran war. The rupee has strengthened to about 94.58 a dollar. This week’s services PMI showed input cost inflation at a six-year low.
Together, these reduce the chance of another rate increase. Many investors now expect the RBI to keep rates on hold in December.
Why that matters for banks
Lower rate expectations help banks in three ways.
Bond portfolios. Banks hold large amounts of government bonds. When interest rate expectations fall, bond prices rise, which increases the value of banks’ holdings. SBI reported treasury losses in the September quarter after the October rate increase pushed bond yields up. Those losses could reverse.
Loan growth. Higher rates make borrowing more expensive and slow loan demand. If rates stop rising, demand for home loans, car loans and business credit should hold up better. Strong vehicle sales in October suggest consumer demand remains healthy.
Asset quality. High rates and fuel costs strain borrowers, particularly small businesses. Lower oil and stable rates reduce the risk of loan defaults.
The foreign investor factor
Banks are also the largest part of the Nifty, which makes them the first stocks foreign investors buy when they return to India. Foreign institutions bought more than ₹14,000 crore of Indian shares on Tuesday and Wednesday combined. Large private banks such as HDFC Bank and ICICI Bank are among the most widely held Indian stocks among global funds.
Kotak Mahindra Bank’s flat performance is the exception, suggesting stock-specific factors are weighing on it.
The main risk for bank stocks is that oil rises again. If US-Iran talks fail and Brent returns above $100, the case for another rate increase would return, and bank stocks could give back their gains. For now, banks are benefiting more than most sectors from the change in the oil outlook.
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