How RBI measures will impact Indian banks? Bank Nifty up over 1%

The Bank Nifty rose by more than 1% during Wednesday's trading session, as the Reserve Bank of India unveiled a series of initiatives designed to enhance credit availability to the real economy, while maintaining the key repo rate at 5.5%. The leading gainers in the Bank Nifty included Kotak Mahindra Bank, AXIS Bank, ICICI Bank, and HDFC Bank, all of which saw rises between 1% and 3%.

RBI Governor Sanjay Malhotra highlighted five important measures aimed at enhancing lending and lowering financing costs which included corporate acquisitions where an enabling framework will be established for banks to finance acquisitions by Indian firms, creating more lending opportunities and facilitating expansion and consolidation.

Secondly Capital market lending where the RBI plans to eliminate the regulatory limit on loans secured by listed debt securities.

Chanchal Agarwal, CIO of Equirus Family Office, remarked that an important positive change is the relaxation of lending regulations in the capital markets. The RBI has increased the prudential limits on loans secured by shares, financing against publicly traded debts, IPO-related funding, and has provided banks with more flexibility in extending credit for acquisition financing. This development is noteworthy, as it allows banks to reclaim flows that had increasingly moved towards structured credit providers.

Furthermore, the policy focus continues on broadening credit intermediation—especially through initiatives that enable the growth of Urban Cooperative Banks—aligning with the overarching Viksit Bharat initiative aimed at enhancing credit availability and strengthening the financial system, said Agarwal.

Going to back to measures, the governor thirdly mentioned withdrawal of 2016 framework where the RBI will abolish the 2016 framework that discouraged banks from offering loans to borrowers with credit limits exceeding ₹10,000 crore.

Fourthly, the governor mentioned infrastructure financing where the risk weights for NBFCs lending to ongoing, high-quality infrastructure projects will be lowered, thereby reducing financing costs.

Fifthly, Sanjay Malhotra highlighted the urban cooperative banks where the licensing process for new UCBs, which has been on hold since 2004, may soon resume.

With reference to the measures, Vishal Goenka, Co-Founder of IndiaBonds.com, said that framework to allow Indian banks to finance acquisitions by domestic corporates, this is big as globally acquisition financing are a large segment of bond issuance. Making this level playing field for domestic banks with foreign investors will help expand capital markets.

Removal of regulatory ceiling on lending against listed debt securities! Growth in any securities markets are powered by funding against them - take the case of equities and mutual funds. With this ceiling removed - financing will flow to listed bonds expanding investment and liquidity in corporate bonds!

Reduction of risk weightage for NBFCs for infrastructure lending will spur better flow of credit financing through capital markets with bonds being the likely choice, believes Goenka.

What are the Q2 banking results likely to show?

Naveen Kulkarni, Chief Investment Officer at Axis Securities PMS, indicated that the second quarter is likely to be another challenging period for banks, characterized by modest growth, pressure on net interest margins (NIM), weaker treasury results compared to previous quarters, and increased credit costs. Credit growth in banks has not yet shown a significant recovery, which is anticipated to occur in the second half of the year.

Kulkarni mentioned that he anticipates NIMs will reach their lowest point in the second quarter thus far. He believes that margins in the second half will receive a boost from deposit repricing and the cut in the cash reserve ratio (CRR). Banks are noticing early signs of improvement in asset quality metrics and are hopeful for better results in the second half.

Kulkarni is of the opinion that valuations for most banks are reasonable, and a clear improvement in growth and asset quality metrics could lead to an upward movement in banking stock prices. His current picks include HDFC Bank, Kotak Mahindra Bank, SBI, and Federal Bank.

Bank Nifty Outlook

According to Rajesh Bhosale, Equity Technical and Derivative Analyst at Angel One, Bank Nifty has displayed resilience in recent sessions and reacted positively post the RBI policy.

The index had been holding firm near the 61.8% retracement support and is now forming a structural higher bottom with a strong bullish candle on the daily chart. Moreover, prices have reclaimed key moving averages, indicating continuation of positive momentum. Upside levels point towards a retest of the recent swing high at 55,800, and a breakout beyond this could pave the way towards 57,000. On the downside, 54,500 remains a strong support base.

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