Bank Stocks After RBI Rate Hike: Jefferies Backs ICICI, SBI, Axis

The Hike and the Signal Behind It

The Reserve Bank of India has started a tightening cycle. On October 7, its Monetary Policy Committee raised the repo rate by 25 basis points, from 5.25% to 5.50%. The six members voted for the increase unanimously.18 It is the first rate hike since February 2023.35 The decision follows four cuts totalling 125 basis points in 2025 and a long pause after them.4 Under the new settings, the Standing Deposit Facility sits at 5.25%, while the Marginal Standing Facility and the Bank Rate are both 5.75%.7

Markets had already priced in the hike itself. The bigger news was the change in stance from "neutral" to "calibrated tightening". That vote split 4-2, so the committee was less united on the stance than on the rate move.8 Governor Sanjay Malhotra was clear about what the shift means. He said rate cuts are off the table in the near term, so the next move will be either a pause or another hike. How far rates go will depend on how growth and inflation develop.14

The RBI's reasons are easy to follow. Crude prices are high, food prices are rising and weather risks are clouding the inflation outlook. The central bank raised its FY27 inflation projection to 5.2% from 5.1%.8 It also lifted its FY27 GDP growth forecast to 7.1% from 6.7%.8 Growth that strong leaves room to tighten. One economist quoted in live coverage said wholesale inflation had been close to 10% for four months and that consumer inflation was approaching the top of the RBI's tolerance band.1

Why Jefferies Calls Banks the Winners

For bank investors, the main question is how higher rates feed into margins. Jefferies has given the most confident answer. Its view is that the policy shift could turn into an earnings catalyst for lenders, and it now prefers banks over non-bank financiers.1516

The argument rests on how Indian loan books are built. Large private banks have a bigger share of loans tied to an external benchmark (EBLR loans), which usually reprice within one to three months of a policy change.13 Deposits reprice more slowly. Jefferies says banks with a high EBLR share and a reasonable domestic loan-to-deposit ratio could see an earnings lift over the next three to six months.1120

Jefferies then ranks the banks:

• Biggest beneficiaries: ICICI Bank and Kotak Mahindra Bank, because they combine a high EBLR share with manageable loan-to-deposit ratios.1220
• Mid-range beneficiaries: HDFC Bank and Axis Bank. Both have a lot of benchmark-linked lending, but higher loan-to-deposit ratios or more reliance on wholesale deposits could reduce the gain.1120
• PSU banks: These have fewer EBLR-linked loans, but they start from lower returns on assets and lower loan-to-deposit ratios. Higher margins could help them absorb wage-settlement costs and the move to expected-credit-loss provisioning.1315
• More exposed: Smaller private banks and NBFCs, whose fixed-rate or internally benchmarked loans reprice more slowly.11

The brokerage also put numbers on it. In its scenario, 75 basis points of hikes flow through to loan yields and banks keep 15% of the benefit. That lifts FY28 earnings most at PNB (about 6%), SBI (about 4%) and Axis Bank (about 3%).1219 Its top large-cap picks are ICICI Bank, SBI and Axis Bank, with Buy ratings and price targets of Rs 1,750, Rs 1,320 and Rs 1,700. Those targets imply upside of 31%, 38% and 39%.12

The NBFC view is mixed. Prime housing finance companies such as LIC Housing Finance and Bajaj Housing Finance, plus diversified lenders such as Aditya Birla Capital, could benefit because more of their assets than liabilities carry floating rates. Mahindra & Mahindra Financial Services and SBI Cards look more vulnerable.1215

How Far Rates Might Go

Jefferies' bullish case depends on more than one hike. Coverage of its outlook is slightly inconsistent on how many more it expects. Several reports say the stance change raised its expectation to 75–100 basis points of hikes, up from 50.1516 A separate Jefferies strategy note describes another 50–75 basis points from here, or about 100 basis points over the whole cycle. That would take the repo rate to around 6.25%.18 The most likely explanation is that the larger figures are cumulative and include October's move. Either way, Jefferies expects a cycle far smaller than the 250 basis points of tightening in 2022.18

Others expect less. Angel One sees the repo rate reaching up to 5.75% in FY27.11 Union Bank's baseline is 75 basis points in total, with the repo at 6% by the end of FY27.1 Bank of Baroda's chief economist had expected a pause in October before hikes from December.3 This range matters for bank stocks, because Jefferies' earnings sensitivity is built on a 75-basis-point scenario. A shorter cycle would mean smaller earnings upgrades.

The Margin Debate

Analysts disagree most about margins. Geojit's VK Vijayakumar sides with Jefferies and says rising floating rates should widen bank margins.11 Angel One's Vaqarjaved Khan expects the opposite in the near term. He sees system-wide net interest margins (NIMs) shrinking by 15 to 25 basis points over the next two quarters as deposit costs catch up with loan yields.11

Both camps could be right, because they are talking about different time periods. Loans reprice first, which helps margins briefly. Deposits follow, which squeezes them. My reading is that Jefferies' three-to-six-month window captures the early benefit. Angel One's caution reflects what usually comes later, when term deposits reset at higher rates.

The current quarter has its own problem, separate from the rate hike. Banks have raised large amounts through foreign currency non-resident (FCNR-B) deposits under the RBI's swap window. Kotak Institutional Equities puts the total at about $127 billion as of August 31.26 An analysis by BusinessLine estimates about $137 billion.29 Part of that money has not yet been lent out, so it earns less than it costs. Kotak expects banks with large FCNR balances to see NIMs fall by 10–20 basis points in the September quarter.27 Systematix expects average NIMs across its coverage to slip about 7 basis points from the previous quarter.23

HDFC Bank's quarterly update shows the trade-off. Deposits grew 18.8% from a year earlier, faster than gross advances at 16.3%. Most of that came from time deposits, up 22.8%, while low-cost current and savings (CASA) deposits grew only 10.8%.24 The bank raised $11.5 billion through the FCNR(B) facility and had lent out $5.7 billion of it through overseas branches.24 That shift in funding mix is the kind of change that can weigh on margins for a while.

What the Q2 Numbers Are Expected to Show

With margins under pressure, analysts expect loan growth and low credit costs to carry September-quarter profits. Two forecasts differ in degree:

• Kotak Institutional Equities expects about 11% year-on-year earnings growth and 11% growth in net interest income. It sees roughly 20% profit growth at private banks and broadly flat profits at state-run banks. Lower treasury income should pull down non-interest income.25
• Systematix is more optimistic. It expects earnings across its coverage, excluding IndusInd Bank, to grow 14.9%, helped by stable or falling provisions.23

The two broadly agree on the drivers. System advances grew 19% year-on-year in August, compared with 11% a year earlier.21 Both expect slippages to stay stable or fall.2325 Both also note that higher government bond yields are cutting into treasury gains, the same yields that come with a hawkish central bank.2325

Funding is the one area where the data disagree. Systematix reports that the system credit-deposit ratio eased to about 80.8% from 83.4% in June, helped by FCNR inflows.23 BusinessLine's analysis of 21 banks' business updates found the opposite. Their aggregate credit-deposit ratio rose to 86.3% from 82% a year earlier, because advances grew 21.4% against deposit growth of 15.3%.29 The two use different samples and comparison periods. Still, the BusinessLine numbers suggest the FCNR boost has not solved the funding gap, and that gap is exactly what Jefferies says limits the rate-hike benefit at banks with high loan-to-deposit ratios.

The Bottom Line

On balance, I think Jefferies' case holds up, but it is a case for picking specific banks rather than buying the whole sector. Its own strategy team expects higher rates to compress equity valuations generally, and that is part of why it prefers large caps.18 Indian banks also start from a weak position. Jefferies notes they have trailed global banks by 55 percentage points over two years, at a time of foreign selling and a weak rupee.1613

The most useful thing to watch in the coming results season is what management says about margins, more than the profit figures. Investors need to know how quickly FCNR money is being lent out, how fast deposits are repricing, and whether CASA shares stop falling. Kotak expects the funding-cost benefit to build in the second half of FY27 as costly wholesale borrowing matures and the FCNR money moves into loans.25 If that happens alongside faster loan repricing, ICICI Bank, Kotak Mahindra Bank and SBI are best placed to benefit. If deposit costs rise first, the margin squeeze Angel One warns about will show up in the results.