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Indian banks can defend earnings during inflation-targeting as credit growth is running ahead & pick-up in corporate loans can make-up for softness in retail — evident from long-term trends, deposit cost inflation may play with a lag and banks carry provision buffers, as per Jefferies. 

“A 100 basis points (bps) lower growth impacts profits by 2-9% & 5 bps lower net interest margin (NIM) by 1-5%, PSUs are more sensitive," the note stated. Sharing its top stock picks, ICICI Bank & Bandhan Bank are top buys, IndusInd Bank (IIB) looks attractive.

Higher inflation & rates tend to have limited impact on banks' credit growth, but with divergent impact on corporate & retail credit growth. Bank's corporate credit growth improves in times of high inflation as working capital needs rise & bonds become costlier, the global brokerage said.

“Banks are better margin-managers across rate cycles as they adjust credit/duration spreads etc. to manage extent of price hikes. We saw this in the recent Covid cycle as well when despite sharp cuts, spreads/margins were largely stable. Loan-mix, funding-mix & asset quality plays are bigger divers of NIM, rather than just interest rates," Jefferies added.

As India gets firmly into inflation control & tracking global regulatory action, we look at FY11-14 period when high oil prices of $100-125/ bbl pushed up India's CPI to 10-11%. This, along with normalisation from GFC, led RBI to raise policy rates and hold them high till CPI moderated. 

“Our India Strategist estimates RBI may raise policy rates by an additional 75-100 bps over next 6m, leading to total hike of 150-180 bps (in reverse repo/SDF terms). Additional CRR hikes might be used for OMOs to abate any surge in G-Sec yields," it added.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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