Banks are likely to benefit from the budget in the long term. The budget talked about financial sector reform and distributing new banking licences, but those are still far in the future. For now, only a couple of things matter.

The bottom line is the lower borrowing programme of the government. At Rs3.43 trillion, it’s some Rs60,000 crore less than what the market had expected, and bonds rallied as a result. For a sector that’s forced to invest in government bonds (24% statutory liquidity ratio), that should come as a positive. However, doubts exist whether the target will be adhered to, which is why bonds pared gains later in the day.

Also See The rate of growth of bank credit is rising this fiscal (PDF)

The lower borrowing programme should, at least in the initial months, also help ease the liquidity crunch and keep interest rate increases in check. In the past few months, banks have struggled to raise deposits and funded much of their incremental loan growth from costlier sources such as certificates of deposit.

Secondly, the 9% growth projection means that credit offtake too is likely to increase. But that still didn’t prove enough to boost bank stocks. The Bombay Stock Exchange’s Bankex index closed the day almost flat, up 0.07%

The other factor affecting the sector is that deposit growth at 6% for the nine months till December lagged credit growth at 12%. With most economists forecasting at least a 100 basis points rate hike by the Reserve Bank of India this year, net interest margins of banks could be squeezed in the coming quarters.

Graphic by Ahmed Raza Khan/Mint