Bank Nifty gains 2.7% as savings deposit rate cuts lift margin outlook

HDFC Bank on Monday cut its savings interest rate by 25 basis points to 2.75 per cent for deposits of less than Rs 50 lakh - its first reduction after five years

Banking stocks rallied on Tuesday after some banks lowered savings deposit rates in a move expected to improve margins. The Bank Nifty index gained 2.7 per cent, outperforming benchmark Nifty, which rose 2.2 per cent.

 

All 12 components of the Bank Nifty index ended with gains, with IndusInd Bank (up 6.7 per cent) and Axis Bank (4.4 per cent) leading the charge. Topweight HDFC Bank rose over 3 per cent.

 

The rally came after HDFC Bank and Axis Bank cut savings deposit rates by 25 basis points (bps) to 2.75 per cent. Analysts expect more banks to follow.

 

 

“In the short to medium term, we continue to expect margins to improve gradually as HDFC Bank replaces high-cost erstwhile HDFC borrowings with lower-cost borrowings as well as lower-cost deposits,” brokerage Macquarie said in a note.

 

“We estimate the savings deposit rate-cut to add about 5 bps to the margins from Q1FY26E (estimate for first quarter of 2025-26) onwards,” it said. The brokerage has an “outperform” rating on HDFC Bank with a target price of ₹2,300.

 

Deposit rates were lowered after the Reserve Bank of India cut the repo rate by 25 bps for the second consecutive time, to 6 per cent. The back-to-back rate cuts were expected to create near-term pressures on bank earnings.

 

Goldman Sachs, in a note last week, said the banking sector may face headwinds in the short term due to lead/lag impacts on deposit pricing, liquidity infusion, and elevated credit costs in the first half of FY26.

 

Investors, however, are expected to look beyond these pressures. The brokerage’s top pick is HDFC Bank, while AU Small Finance Bank, and Kotak Mahindra Bank are other “buy-rated” stocks in the banking space.