Indian banking stocks have emerged as the biggest casualties in the recent market crash. Investor sentiment deteriorated amid a steady rise in bond yields, as the Reserve Bank of India (RBI) barred banks from offering rupee non-deliverable forwards, just days after tightening limits on their local positions.
Among other concerns, rising fears of prolonged inflation—potentially prompting the RBI to delay rate cuts further—have weighed on sentiment toward banking stocks, even as credit growth picked up in the fourth quarter.
Pre-war pressure deepens as Nifty Bank logs worst month in 6 years
Even before the start of the US–Iran war, banking stocks were under pressure following unexpected announcements in the Union Budget 2026. It further intensified after the fallout of the Middle East conflict, causing the Nifty Bank to drop 17% in March, marking its biggest monthly decline in six years.
The crash has pushed the index to drop 16% in five weeks and trade near its one-year low. Specifically, state-owned bank stocks witnessed heavy selling, as the Nifty PSU Bank index plunged 20% in March, entering bear-market territory, while the Nifty Private Bank index dropped 16%.
Abhinav Tiwari, Research Analyst at Bonanza, said that banking stocks are falling mainly because the market is becoming concerned about future profitability rather than current business growth.
He noted that although Q4 updates from select banks show healthy growth in advances and deposits, investors are focusing on rising funding costs.
Tiwari further noted 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.
He also pointed out that 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. If crude oil remains high, inflation and the current account deficit may rise, keeping rates elevated for longer.
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 said 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, while noting that the PSU banking sector is still at a 33% premium to its long-term average valuation.
Widespread correction pushes 8 banking stocks into bear market
The sustained crash has pushed eight Nifty Bank stocks into bear market territory, with IDFC First Bank falling 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.
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