Nifty Bank to outpeform Nifty? Why Goldman Sachs is bullish despite $9 bn FPI outflows

Goldman Sachs expects Nifty Bank to outperform the broader market in the near term, supported by easing financial conditions, improving credit growth, and regulatory tailwinds. The rapid 100 basis points policy rate cuts in 2025, combined with enhanced liquidity and a range of RBI regulatory relaxations, are expected to progressively reduce banks’ capital constraints (estimated ~2 per cent of total bank credit) and funding costs. Stabilizing asset quality and typical transmission lags should drive a credit growth recovery from 2H FY26, with additional support from planned capital-easing measures in 2027 and proposed easier offshore borrowing norms.

Goldman Sachs said it remain overweight on banks and NBFCs in its sector-allocations. "Tactically, we think the Nifty Bank index (NSEBANK Index) should outperform the broader Nifty index in the near term. Nifty Bank has gained 2 per cent vs Nifty in the last 1 month, but still offers 11 per cent upside to 2023 relative peak and 34 per cent upside to 2019 relative peak. Relative valuations of financials vs the MSCI India index suggest current risk-reward looks attractive for the sector relative to the broad market," Goldman Sachs said.  

MSCI India Financials currently trades at a 22 per cent discount to MSCI India, about 1.5 standard deviation below the historical average.

Heading into Q2 results, consensus expectations are low, with EPS growth forecast at 1 per cent YoY for financials and minus 3 per cent YoY for banks — the slowest since Covid. Goldman said that earnings could inflect from here as analysts look past weak near-term results toward stabilizing asset quality, signs of consumption revival, and RBI’s regulatory relaxations. Consensus projects financials’ profits to grow 15 per cent in CY26E, up from 8 per cent in CY25E, driven largely by loan growth recovery in banks.

Financials remain out of favor, offering attractive risk-reward. Domestic funds are underweight financials, while foreign investors have sold $9 billion since last year. 

With mid-cycle valuations at 17 times and a 15 per cent consensus EPS growth in CY26E, financials trade at a 1.1 times PEG ratio versus MSCI India at 1.5 times, making the sector compelling. Goldman expects 

Key risks included muted credit demand. While supply-side conditions are improving, external headwinds — such as elevated US tariffs on Indian exports and higher US visa costs — could restrain corporate borrowing. However, Goldman expects an improving growth backdrop in 2026, driven by peak fiscal consolidation being past, lower eventual tariffs, and an additional repo rate cut before year-end.