Flood of Good News for Banks, Should You Dive In?

It is raining good news for Indian banks in recent times, with the latest being the Reserve Bank of India’s (RBI) new guidelines on the Liquidity Coverage Ratio (LCR), aimed at easing liquidity and freeing up further resources for lending by banks.

These measures by the RBI are seen as a net positive by market experts, especially when compared with the previous draft, which had a negative underlying tone for lenders. “The final guidelines reduce the run-off rate for digital deposits to 2.5% from 5% in the draft. A new norm of reducing run-off on wholesale funding from legal entities to 40% from 100% has been introduced, which is positive,” Nuvama Institutional Equities noted.

Meanwhile, banks are also given sufficient time to transition to the new guidelines, thanks to the implementation timeline of April 2026. Analysts at IIFL Capital expect the new guidelines to boost banks' Liquidity Coverage Ratio (LCR) by 6%, loan growth by 1.5%, and profit after tax by 1–4%, easing earlier concerns of a potential drag on liquidity and profitability under the draft version.

Adding to the bullishness, several other positives are also working in the background for the banking sector. The Reserve Bank of India’s liquidity-boosting measures and two consecutive rate cuts, which prompted banks to lower deposit rates, have improved overall liquidity and supported bank margins, setting the stage for growth. Further fuelling optimism, industry bellwethers—HDFC Bank and ICICI Bank—delivered quarterly results that beat market expectations, driven by robust credit growth and stable asset quality.

Riding on these positives, shares of banking players have also been basking in the green territory since their March lows. The robust gains across most lenders have also lifted the benchmark Nifty Bank index to a fresh record high today, as it stands at a kissing distance from the 56,000-mark.

Not just that, analysts are also looking at the sector as a bet to ride out the anticipated volatility in the coming period, backed by green shoots of improvement, reasonable valuations, and the sector’s underperformance in recent years.

“While the newsflow for banks has been positive so far, one should also keep an eye on valuations. Some larger private banks are quickly pricing in all the good news. Some well-performing PSU banks are still below their median long-term valuations and may offer a better risk–reward proposition,” said Sham Chandak, Head – Institutional Equities at Elios Financial Services. “Overall, banking as a sector should outperform the broader market over the next 12 months,” Chandak added.

Kranthi Bathini, Director – Equity Strategy at WealthMills Securities, shared similar optimism as he sees the worst for banks behind us. Factoring in the recent positive newsflow flooding the sector, Bathini sees the banking space as an attractive bet from a medium- to long-term perspective, more so as valuations are largely near their long-term averages.

Non-performing asset (NPA) levels for banks are at an all-time low, while Net Interest Margins (NIMs) are likely to bounce back amid the ongoing rate cut cycle—meaning good times are ahead for lenders, Bathini added.

Now, while experts see a bright future for the overall banking space, analysts at Motilal Oswal Financial Services have a preference for large-cap players, attributing their choice to attractive valuations in light of the positive earnings outlook. “These banks have shown stronger resilience amid macroeconomic uncertainties and boast healthier balance sheets,” MOFSL noted.

Looking ahead, the firm projects earnings for private banks to grow by around 12% in FY26 and 19% in FY27, compared to 7% and 12% growth for public sector banks (PSBs) over the same period.

Even among large-cap banks, ICICI Bank emerged as the consensus top pick, thanks to its compelling valuations and consistent performance. HDFC Bank, on the other hand, is widely viewed as being at an inflection point, poised to return to 20% growth, making it a high-quality, long-term bet in the banking space.