Banking stocks: Investors need to tread cautiously amid macro challenges

Indian inflation is running at 7.4 per cent, while the 364-day T Bill yield in late September auctions was 6.65 per cent

Analyst previews of the banking sector are fairly optimistic despite the macro deterioration. The quarter two results for the 2022-23 financial year (Q2FY23) are expected to be good. The rise in policy interest rates has resulted in an increase in NIM (net interest margin) because banks have passed on the rate hikes asymmetrically, raising lending rates more than deposit rates. So far, credit demand has not been affected.

This is normal in the first couple of quarters of a tightening monetary cycle. Banks (and other lenders) see at least temporary widening of interest spreads. At this early point, interest rates