Challenges Ahead: Why Banking Stocks May Struggle Despite RBI Rate Cuts

As the Reserve Bank of India (RBI) contemplates following the US Federal Reserve’s potential 50 basis points (bps) rate cut, there’s a prevailing expectation that banking stocks might receive a boost. However, market experts caution that the sector will likely continue facing challenges that could hinder their performance, even with easing monetary policy.

Current Market Dynamics

The Bank Nifty index has risen approximately 9% this year, significantly underperforming compared to the Nifty 50, which has gained over 16%. This disparity raises concerns about the underlying health of the banking sector amidst shifting economic conditions.

Chokkalingam G, founder of Equinomics Research, highlights critical factors affecting banking stocks, including increasing credit losses, slow deposit growth, and a widening credit-deposit ratio. These challenges are likely to keep banking stocks under pressure, regardless of any short-term relief provided by rate cuts.

Deposit Growth and Loan Margins

Research analyst Dnyananda Vaidya from Axis Securities concurs, noting that while repo-linked loans typically adjust with changes in interest rates, the resulting squeeze on bank margins remains a concern. A significant portion of loans being linked to repo rates means that any cuts could further impact profitability.

If the RBI enacts a 50 bps rate cut, large private banks like HDFC Bank and Kotak Mahindra Bank might see their margins pressured by 15-20 bps. Conversely, banks with a higher share of fixed-rate loans, such as IndusInd Bank, are expected to feel less impact.

CASA Ratio and Future Outlook

Historically, the Current Account Savings Account (CASA) ratio improves during rate-cut cycles. However, analysts project a potential drop of about 450 bps in the CASA ratio by March 2024. While future rate cuts could facilitate a slight recovery in CASA ratios, the overall deposit growth remains uncertain.

Nomura projects system deposit growth to rise to 13% year-on-year for FY25, up from the current levels, but this improvement hinges on multiple factors, including investor sentiment and economic stability.

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In conclusion, while banking stocks may see some investor interest with anticipated rate cuts from the RBI, the challenges facing the sector are substantial. Investors should remain cautious and consider a stock-specific approach, as the overall landscape for banking stocks appears to be fraught with potential pitfalls.

[Disclaimer: This article is for informational purposes only and does not constitute financial advice. Readers should conduct their own research and consult with financial professionals before making investment decisions.]