HDFC Bank, Canara Bank, and PNB Lag as Bank Nifty Index Rebounds 1%, Led by SBI and IDFC First

Market Volatility Triggers Selloff in Banking Index

The Nifty Bank index witnessed sharp volatility on Thursday, 4 June, as concerns over the escalating conflict in the Middle East, elevated crude oil prices, and caution ahead of the Reserve Bank of India's monetary policy decision weighed on investor sentiment. The banking index slipped 0.6% to an intraday low of 53,829.40 before recovering nearly 1% from the day's low to touch an intraday high of 54,333.70.

The index has remained under pressure in recent months, declining 1% over the past month, 7.6% in three months, and 8.5% in six months. While certain large-cap lenders like HDFC Bank and Punjab National Bank dragged the banking index, PSU lenders SBI and Bank of Baroda showed some resilience.

The broader Indian stock market also opened weak. The benchmark indices Sensex and Nifty 50 came under pressure following negative global cues. Asian markets traded lower, while US markets ended in the red overnight as the latest escalation in the US-Iran conflict kept crude oil prices elevated and fueled inflation concerns. Investors also remained cautious ahead of the RBI Monetary Policy Committee meeting scheduled between June 3 and June 5, with expectations that rates may remain unchanged but accompanied by a hawkish stance on inflation.

Read also: Microsoft's Project Solara Raises Questions About the Future of Mobile Apps

Sensex fell 0.7% in early trade to a low of 73,807.30 before recovering around 1% to trade near 74,478.16. Developments in the Middle East remained in focus, with Iran's foreign minister stating that "no tangible progress" had been made in negotiations to end the conflict, while US President Donald Trump expressed optimism about a breakthrough agreement.

Among banking stocks, Canara Bank fell 1.6%, Punjab National Bank declined 1.4%, AU Small Finance Bank dropped 1.2%, HDFC Bank lost 1.1%, Kotak Mahindra Bank slipped 0.9%, and Axis Bank was down 0.7%. On the other hand, IDFC First Bank gained 1.4%, State Bank of India rose 1.2%, Bank of Baroda added 1%, while Federal Bank and ICICI Bank advanced 0.8% each.

According to Choice, margins for most large private banks remained stable during Q4 FY26, despite the cumulative 125 basis points repo rate cut over the past 15 months. The Weighted Average Lending Rate for fresh loans and outstanding loans declined by 93 basis points and 88 basis points, respectively, between February 2025 and March 2026. On the liability side, the Weighted Average Term Deposit Rate for fresh and outstanding deposits fell by 55 basis points and 47 basis points, reflecting continued challenges in mobilizing deposits at lower rates.

Read also: Microsoft Unveils Seven New AI Models with Enhanced Capabilities in Reasoning, Coding, Imaging, and Voice Processing

Choice expects the systematic banking credit growth to slow down from 16.1% observed in FY26 to a range of 12.0%-13.0% in FY27E, reflecting softer domestic demand stemming from the second-order effects of West Asia Conflict. Elevated global bond yields and rising energy costs underpin their forecast of a 25-50 bps rate hike in FY27E.

Choice expects FY27 earnings growth for banks to be supported by continued credit demand from MSME and retail segments, along with potential improvement in net interest margins driven by higher lending rates following anticipated repo rate hikes. The current West Asia Conflict poses serious upside risks to India's CPI inflation trajectory, and Choice anticipates RBI will shift towards policy tightening over the next six months. Against this backdrop, Choice forecasts improvement in NIMs of both private and PSU banks over FY27E.