RBI monetary policy: 5 bank stocks to buy amid potential turn in interest rate cycle

Ahead of the RBI monetary policy outcome today, MOFSL said it has been closely monitoring the potential turn in the interest rate cycle and the overall pace of monetary easing, as these factors will significantly impact the underlying margin trajectory. The domestic brokerage said the progress in deposit mobilisation will be critical, as an elevated CD ratio and rising inflation rates would make it challenging for lenders to reduce deposit rates and, consequently, lower their funding cost.

MOFSL prefers five bank stocks namely ICICI Bank Ltd, HDFC Bank Ltd, State Bank of India (SBI), Federal Bank and AU Small Finance Bank Ltd.

Among banks, AU Small Finance Bank has 62 per cent of its loan book linked to fixed rate, followed by SBI at 37 per cent. In contrast, private banks exhibited the highest proportions of loans linked to the repo rate or EBLR with Kotak at 60 per cent, Axis Bank at 57 per cent, ICICI Bank at 52 per cent, Federal Bank at 50 per cent and HDFC Bank at 43m per cent.

The broking firm said banks with a higher proportion of fixed-rate loans and a lower duration of liabilities are expected to report more resilient NIM performance over FY26.

That said, it remains cautious about the ongoing delinquency cycle in unsecured loans and the associated interest reversals, as high credit costs and an adverse asset mix will exert pressure on banks’ profitability.

The quantum and the pace of rate cuts by the RBI will depend on macroeconomic factors such as inflation and GDP data, MOFSL said.

"We estimate that NIM will further moderate by 10-21bp for FY26 over our base case, with a projected PAT decline of 4.4 per cent to 7.1 per cent under a 75bp rate cut scenario. This projection already incorporates a 30-40bp rate cut in our base case estimates," MOFSL said.

MOFSL said earnings momentum of PSU banks remain strong leading it to raise its FY25 projections by 1.5 per cent. But with RoA profile nearly maturing, it estimated earnings growth to broadly track loan growth at 10-
11 per cent CAGR over FY25-27E. 

"Headwinds on margins and potential rise in credit cost remains a key risk," it said.
  
MOFSL said PSBs are increasingly exposed to MCLR-linked loans, with Indian Bank holding the highest share at 58 per cent, followed by Canara Bank at 48 per cent, and SBI and PNB at 36 per cent and 34 per ecnt, respectively. 

While a handful of economists see the six-member RBI monetary policy committee (MPC) members to maintain status quo on policy rate and may instead go in for a cut in cash reserve ratio (CRR) and/or liquidity enhancing measures such as open market operations (OMOs), Nomura India economists see an out-of-consensus 25 basis points (bps) rate cut tomorrow. If the Shaktikanta Das-led RBI committee does so, repo rate would decline to 6.25 per cent.