Nifty Bank gains 3% post RBI's 50 bps hike; analysts see more headroom

The Reserve Bank of India's (RBI's) 50-bps repo rate hike triggered a sharp pullback rally in banking stocks on Friday. The Nifty PSU Bank index did even better with a rise of 3.01 per cent

The Reserve Bank of India's (RBI's) 50-basis point (bps) repo rate hike triggered a sharp pullback rally in banking stocks on Friday. Relative to the Nifty50's 1.64 per cent gain, the Nifty Bank index surged 984 points, or 2.6 per cent, on the National Stock Exchange (NSE). It had rallied 3 per cent intra-day.

The Nifty PSU Bank index did even better with an intraday rise of 3 per cent, compared with the Nifty Private Bank index's 2.8-per cent up move. Individually, Federal Bank, Punjab National Bank (PNB), IDFC First Bank, Bank of Baroda, IndusInd Bank, Kotak Bank, HDFC Bank, AU Small Finance Bank, ICICI Bank, State Bank of India (SBI), Axis Bank, and Bandhan Bank rallied between 2 per cent and 5.6 per cent.

According to analysts, Friday’s steep up move was largely a “post-event” relief rally, as investors had been waiting on the sidelines ahead of the Monetary Policy Committee’s (MPC’s) meeting.

"After the US Federal Reserve’s 75-bps rate hike last week, the RBI’s interest rate decision had become a key monitorable. As investors were anticipating a 50-bps hike, an in-line action by the RBI boosted sentiment," said Siddharth Khemka, head of retail research at Motilal Oswal Financial Services.

Since the US Fed’s rate hike action on September 21, bank stocks have taken a beating. PNB, Axis Bank, AU SFB, BoB, and Bandhan Bank, for instance, tumbled in the range of 10 per cent to 13 per cent since then, while HDFC Bank, SBI, Kotak Bank, and ICICI Bank lost between 8 and 9 per cent.

In comparison, the Nifty50 index slipped 5 per cent, the Nifty PSU Bank index shed 9.4 per cent, and the Nifty Private Bank index declined 8.4 per cent during the period, ACE Equity data shows.

This cautious approach of investors, ahead of the RBI’s monetary policy outcome, is being reversed now, believes Deepak Jasani, head of retail research at HDFC Securities.

"Along with the relief rally, what we saw on Friday was the pent-up demand for bank stocks as investors had deferred going long on related stocks ahead of the interest rate outcome," he said.

Moreover, analysts said potential short-covering in the sector, along with fresh buying after expiry of the September F&O series, may be driving the stock prices higher, especially the bank stocks.

According to YES Securities, the Nifty Bank index ended the September derivatives series at 37,647.75 levels with rollover at 82 per cent (2.4 million shares).

The highest bank-wise rollover was seen in HDFC Bank (98 per cent), Axis Bank (97 per cent), ICICI Bank and Kotak Bank (96.5 per cent), Federal Bank and Bank of Baroda (95 per cent each), and Bandhan Bank (94 per cent).

Going ahead, analysts say near-term volatility may continue to dent banking stocks as central banks continue with their rate hiking spree. However, robust long-term fundamentals will keep investors buoyed about the sector.

"Despite interest rate hikes, India’s economy is expected to remain robust. While increased interest rates may mildly affect loan off-take, the overall systemic credit growth is likely to stay in double digits in FY23. Besides, expectations that banks will pass on rate hikes to customers will cushion margin pressure. Thus, bank stocks look good from a long-term perspective," said Khemka of MOFSL. Typically, rising interest rates are positive for banks as assets (loans) get reprised faster than the liability (deposit) book, helping in increasing net interest margins.

Naveen Kulkarni, Chief Investment Officer at Axis Securities PMS, added that with RBI data indicating strong credit growth, currently at a multi-year high, we believe most banks, especially those with a higher share of the floating rate will be better placed in the rising interest rate environment. However, the lagging deposit growth remains a cause of concern, he said.