Indian Bank Stocks Face Potential Worsening of $95 Billion Loss Amid Macroeconomic Uncertainty

Indian Banks Stocks Face Further Pain as Central Bank's Moves Weigh on Profit Outlook

The Indian banking sector, the largest component of the country's stock market, is expected to face further challenges as the Reserve Bank of India's (RBI) defense of a record-low rupee and growth shock from rising energy prices dent the profit outlook. The RBI's move to defend the rupee has constrained its ability to inject liquidity, tightening financial conditions that are likely to weigh on banks over the coming quarters.

A prolonged conflict in the Middle East also risks derailing India's nascent credit recovery, threatening loan growth as the broader economy cools. The impact of these factors is already being felt, with global investors withdrawing a record 327 billion rupees ($3.5 billion) from shares of financial services companies in the first fortnight of March, according to data from the National Securities Depository Ltd. The Nifty Bank Index has lost $95 billion in market value since the start of March, narrowly avoiding a bear market, which is defined as a 20% drop from a recent high.

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The outlook for India's $4.5 trillion stock market is at stake, given that banks account for nearly a third of the benchmark index. A sustained weakness in shares of lenders could undermine a broader market that is already among the worst performers in the region, down 13% for the year. However, bulls point to improving valuation multiples for bank stocks and India's long-term economic growth, which remains among the fastest globally.

The Nifty Bank Index trades at 1.5 times one-year forward price-to-book, its cheapest level since 2020, signaling an attractive risk-reward profile. Citibank Inc. is already prioritizing private-sector banks over state-run lenders, betting that the former can better absorb the macroeconomic stress that is now the prime concern for investors. However, Jefferies estimates banks could face as much as 50 billion rupees from unwinding their currency trades due to diktats of the central bank.

Fitch Ratings sees net interest margins of lenders shrinking 20-30 basis points in the year ending March 2027, potentially undershooting the credit rating agency's 3.1% forecast, as tighter financial conditions weigh. "Banks will definitely take some hit on their investment book," said Rajat Agarwal, an Asia strategist at Societe Generale SA. "We recently saw a pickup in credit growth — what remains to be seen is how much of that gets pushed back" by the war, he said.