Nifty Bank outlook: Goldman Sachs expects index to outrun Nifty near-term

Goldman Sachs expects Nifty Bank to outperform Nifty50 in the near-term, aided by easing regulatory norms and better liquidity

Goldman Sachs on India banks: India’s banking sector is set to enter a new growth phase, likely in the second half of the current financial year (H2FY26), powered by a combination of policy rate cuts, liquidity easing, and sweeping regulatory reforms from the Reserve Bank of India (RBI), analysts at Goldman Sachs said on Thursday.

 

Besides, they expect the “deregulation dividend” by the RBI to unlock credit expansion, lower funding costs, and revive earnings momentum across the financial system by FY26-27.

 

For stock market investors, this may mean a potential outperformance of the Nifty Bank index, compared to the benchmark Nifty50 index, in the near-term, Goldman Sachs predicted.

 

Policy support for India banks

 

Following a period of high real interest rates and liquidity stress from late 2023 to 2024, the RBI turned decisively toward monetary easing in calendar year 2025. The central bank has cut policy rates by 100 basis points this year, marking one of the fastest easing cycles since the global financial crisis of 2008-09. 

 

Alongside this, it cut the Cash Reserve Ratio (CRR) by one-percentage-point, and announced a host of regulatory relaxations, including lowering banks‘ capital requirement and relaxation of external commercial borrowing (ECB) norms.

 

Given this, Goldman Sachs analysts expect these measures to reduce system-wide capital requirements by nearly two percentage points of the total bank credit. 

 

“Lower capital charges for sectors such as housing loans, MSMEs, and rated corporates are expected to free up balance-sheet capacity, enabling banks to redeploy funds toward productive lending,” it said in a note dated October 15, 2025.

Liquidity and capital easing to spur credit growth

 

The improved liquidity conditions, according to Goldman Sachs, are expected to translate into faster loan growth beginning in the second half of FY26. 

 

“We note that most of these capital easing measures will become effective 2027, hence the impact on growth will likely be felt over the next two years,” it said.

 

Additionally, the RBI’s relaxation of ECB regulations could help attract foreign capital and offer Indian firms greater flexibility in funding expansion and mergers.

 

The easing cycle, thus, will help normalise credit spreads and lift profitability across the Indian banking sector, Goldman Sachs pointed out.

Asset quality concerns easing

 

The past two years saw aggressive retail lending and rising unsecured credit, which triggered regulatory tightening in late 2023. Since then, risk weights on consumer loans and microfinance have been increased, curbing excesses. 

 

These steps are now bearing fruit: growth in personal loans has slowed to single digits, while delinquencies across key segments have stabilized. With the asset-quality cycle peaking, banks and NBFCs are entering FY26 with cleaner books and better underwriting discipline.

Earnings outlook turns positive

 

In this backdrop, analysts at Goldman Sachs anticipate a rebound in the financial sector’s earnings after a soft patch in CY-2025. 

 

Consensus forecasts project profit growth of 15 per cent in CY26, up from 8 per cent this year. 

 

“With the policy rate-cutting cycle nearing its end and asset quality stabilising, the worst of margin compression appears over. Large private banks are projected to see loan growth climb from about 10 per cent currently to 13 per cent by FY27-FY28, driving double-digit earnings growth across financials,” the brokerage said.

Investment strategy: Attractive valuations present investor opportunity

 

On the valuation front, the MSCI India Financial index is trading around 17-times forward earnings, which is below the five-year average. It is also at a 22 per cent discount to the broader market. 

 

Domestic mutual funds remain under-allocated to financials, and foreign investors have sold nearly $9 billion in the past year, leaving room for re-entry as sentiment turns, it said.

 

“We expect Nifty Bank and NBFC indices to outperform the broader Nifty50 in the near term, supported by favorable risk-reward dynamics and structural growth catalysts,” analysts at Goldman Sachs said.

 

That said, while supply-side conditions are improving, the pace of credit recovery depends on economic demand. External pressures, including high US tariffs on Indian exports and elevated visa costs affecting the IT sector, could temper corporate borrowing appetite.