Banking Stocks Plunge as Macro Economic Pressures Intensify, Nifty Bank Index Drops 16% in Five Weeks

Indian Banking Stocks Plummet Amid Market Crash

The recent market downturn has taken a severe toll on Indian banking stocks, with investor sentiment deteriorating due to a steady rise in bond yields. The Reserve Bank of India (RBI) has further exacerbated the situation by barring banks from offering rupee non-deliverable forwards, just days after tightening limits on their local positions.

The RBI's decision has triggered a series of concerns among investors, including the potential for prolonged inflation, which may prompt the central bank to delay rate cuts further. This, in turn, has weighed on sentiment toward banking stocks, despite credit growth picking up in the fourth quarter.

Nifty Bank Logs Worst Month in 6 Years

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The Nifty Bank index has logged its worst month in six years, plummeting 17% in March. This decline has pushed the index to drop 16% in five weeks and trade near its one-year low. The Nifty PSU Bank index has suffered the most, plunging 20% in March and entering bear-market territory. The Nifty Private Bank index, on the other hand, dropped 16% in the same period.

According to Abhinav Tiwari, Research Analyst at Bonanza, banking stocks are falling mainly because the market is becoming concerned about future profitability rather than current business growth. Tiwari noted that although Q4 updates from select banks show healthy growth in advances and deposits, investors are focusing on rising funding costs.

Tiwari pointed out that smaller private banks such as IDFC First Bank, Bandhan Bank, and RBL Bank have increased lending rates because deposits are becoming expensive and they are relying more on bulk deposits and certificates of deposit for funding. This means the cost of raising money is rising faster than loan yields, which may put pressure on margins in the coming quarters.

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The RBI's $100 million cap on forex positions may reduce treasury flexibility and lead to temporary mark-to-market losses, affecting short-term treasury income for some banks. According to Tiwari, the market is also reducing expectations of an early rate cut by the RBI, as inflation risks have increased due to rising global energy prices and war-related uncertainty.

Expectations of Early Rate Cut Diminish

Mohit Gupta, Director at EquiRize Securities, also expects the RBI to maintain a cautious stance, with a continued pause on rates while retaining a hawkish bias. Liquidity conditions and the transmission of previous rate hikes will remain key focus areas.

In terms of valuations, brokerage firm Motilal Oswal noted that the private banking sector is currently trading at 1.8x P/B, reflecting a 27% discount to its long-term average valuation of 2.5x. The PSU banking sector, on the other hand, is still at a 33% premium to its long-term average valuation.

8 Banking Stocks Pushed into Bear Market

The sustained crash has pushed eight Nifty Bank stocks into bear market territory. IDFC First Bank has fallen 31% from its recent high, while YES Bank trades 26.46% below its October 2025 peak. HDFC Bank, the country's largest bank in terms of market capitalization, has also been severely punished by investors, as it fell 26.42% to ₹750 apiece. Other major private sector banks, such as Kotak Mahindra Bank and IndusInd Bank, are down by over 20%. In the PSU space, Bank of Baroda, Punjab National Bank, and Canara Bank are off 23.33%, 22.69%, and 22%, respectively, from their recent highs.