Indian banks hit record as new RBI liquidity rules boost outlook

[NEW DELHI] Shares of Indian lenders rallied to a fresh record on Tuesday (Apr 22), as the easing of liquidity rules by the central bank added to the optimism for the country’s financial services sector.

A gauge of the nation’s top banks jumped as much as 1.2 per cent, with HDFC Bank, Kotak Mahindra Bank, and the State Bank of India leading the winners. The Nifty Bank Index has rebounded from a nine-month low in early March, with the advance adding almost US$100 billion to the gauge’s market value. 

The Reserve Bank of India late Monday allowed banks to allocate a smaller portion of retail deposits to sovereign bonds as a liquidity buffer, relaxing requirements in an era of mobile banking. This move is expected to improve banks’ liquidity coverage ratio by 600 basis points, freeing up capital for lending.     

The rally – led by private lenders – reflects growing investor confidence that the sector’s credit growth is recovering from last year’s slump, driven by the RBI’s measures. Governor Sanjay Malhotra has eased lending rules since taking office in December, while significantly boosting banking system liquidity. This has put the sector on pace to outperform its Asian peers this month by the most since 2022.

“If investors want to catch this uptick, they’ll be more comfortable adding big weight to India’s private banks because there is quality, they have a large weight in the index and always tend to move first,” said Sat Duhra, portfolio manager at Janus Henderson Investors. 

However, challenges remain. Most analysts expect retail credit growth to remain sluggish or in line with the overall system credit, and businesses are still wary of spending on capital formation. Also, the 50 basis points of rate cuts since February may pressure loan yields near term, as a large part of loans are tied to external benchmark rates. 

For now, the robust quarterly earnings on the weekend from ICICI Bank and HDFC Bank – two of India’s largest private lenders – is supporting the momentum for the sector.  BLOOMBERG