India’s banking sector soared to new heights on April 22, 2025, with the Bank Nifty reaching a record 55,961, marking the sixth consecutive session of gains. This rally has been fuelled by growing investor optimism, thanks to a wave of liquidity-enhancing measures by the Reserve Bank of India (RBI).

These initiatives are part of RBI Governor Sanjay Malhotra’s proactive strategy to address concerns around slowing credit growth, global economic headwinds, and tightening financial conditions.

Why are investors bullish on banking stocks?

The recent rally in banking stocks, which form nearly 22% of the Nifty, is attributed to a combination of regulatory tweaks, monetary easing, and targeted liquidity support from the RBI. Analysts say these changes are giving banks the ability to lend more, even as global uncertainties persist.

One of the key changes announced by the RBI is a revision to the liquidity coverage ratio (LCR) requirements. Under the new guidelines, banks are allowed to allocate a smaller portion of their retail deposits to sovereign bonds, freeing up resources traditionally held as liquidity buffers.

Rs 3 lakh crore liquidity boost on the horizon

This LCR tweak could enhance banks’ liquidity coverage by about 600 basis points, allowing them to unlock nearly Rs 3 lakh crore in capital, which can be redirected to fresh lending activities. According to analysts, this measure alone could add up to 2% in credit growth across the sector.

Brokerage firm Macquarie estimates the additional deployable liquidity at around Rs 2.5–3 lakh crore, which could translate into a 1.4–1.6 percentage point boost in credit growth. On the other hand, Morgan Stanley projects a 1–2% increase in loan disbursals, coupled with a 2–4 basis point improvement in margins for banks.

RBI’s broader liquidity strategy

Since December 2024, Governor Malhotra has implemented a series of strategic measures to shore up banking sector confidence and credit availability. Some of the key interventions include:

• Two repo rate cuts (25 basis points each) in February and April 2025

• Nearly Rs 7 lakh crore infused into the banking system via:

  • Open market operations (OMOs)

  • Variable rate repo (VRR) auctions

  • Foreign exchange swaps

• Reduced risk weights for NBFCs and MFIs, helping increase credit flow to underserved sectors

These measures are aimed at lowering the cost of funds for banks, encouraging them to lend more, and supporting the overall economic recovery.

What do analysts say?

Siddhartha Khemka, head of research at Motilal Oswal Financial Services, explained that the RBI’s liquidity-focused interventions have a cascading effect across the financial ecosystem.

“Each move by the RBI lowers the cost of capital and supports net interest margin (NIM) expansion for banks. The impact on Q4 earnings is already visible,” said Khemka.

For example, ICICI Bank’s margin improved by 16 basis points, significantly beating expectations of 4–5 bps. With the RBI’s support, Khemka predicts a 15% upside for ICICI Bank over the long term, citing its strong quarterly results and strategic positioning.

Top banking stocks drive broader market rebound

As a result of this positive sentiment, the Nifty index has gained over 2,000 points from its recent lows. Banking giants have been key contributors:

• HDFC Bank added over 300 points

• ICICI Bank contributed 195 points

• Axis Bank added 110 points

• SBI (State Bank of India) boosted the index by 70 points

Together, these heavyweight banks have powered the recovery in the broader market, reinforcing investor belief in the resilience and future potential of Indian banks.

NBFCs also in spotlight

It's not just traditional banks that are benefiting. The RBI’s efforts to improve liquidity and lower risk weights for non-banking financial companies (NBFCs) have also revived investor interest in the sector.

Macquarie and Morgan Stanley have both highlighted Shriram Finance and Mahindra Finance as top picks in the NBFC space, expecting them to benefit from the improved credit environment and margin tailwinds.

A critical time for credit growth

The RBI’s measures come at a time when the banking system was showing early signs of credit slowdown. As per data till April 4, 2025, bank credit stood at Rs 18.2 lakh crore, a sharp 33% year-on-year drop.

With enhanced LCR flexibility and capital availability, banks now have the tools to reverse the downtrend in lending, and analysts believe this could reignite growth in sectors like housing, MSMEs, and retail consumption.

Looking ahead: A stronger financial ecosystem

The confluence of monetary easing, regulatory flexibility, and targeted liquidity support is expected to drive a sustained recovery in India’s banking and financial services industry.

Investors will be closely watching Q1 FY26 earnings, where the full impact of the RBI’s April policy changes should start becoming visible.

Conclusion

With the Bank Nifty scaling new peaks, the RBI’s proactive measures are proving effective in reviving investor sentiment and pushing the sector toward renewed growth. As systemic liquidity improves and lending picks up, the outlook for banks—and by extension, the broader Indian economy—appears increasingly promising.

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