Jefferies On Indian Financials: The Reserve Bank of India's shift to a “calibrated tightening” stance could turn higher interest rates into an earnings catalyst for Indian banks, according to Jefferies analysts Prakhar Sharma and Vinayak Agarwal.
The brokerage now sees scope for 75–100 basis points of further rate hikes, well above the earlier 50-basis-point expectation, and prefers banks over NBFCs.
Jefferies has named ICICI Bank, State Bank of India and Axis Bank as its top picks among large-cap banks. The brokerage believes banks with higher exposure to policy-rate-linked loans and manageable loan-to-deposit ratios could see earnings benefits over the next three to six months.
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Why Jefferies Expects More Rate Hikes
The RBI raised the repo rate by 25 basis points to 5.5%, but Jefferies believes the bigger signal was the change in policy stance from “Neutral” to “Calibrated Tightening”.
According to the brokerage, the shift indicates limited scope for rate cuts and could be accompanied by tighter liquidity conditions. This could push market rates higher than the RBI's policy rate and take the eventual rate-hike cycle to 75–100 basis points, compared with the earlier consensus expectation of 50 basis points.
That change in the rate outlook could have very different implications across financial stocks.
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ICICI Bank, Kotak Seen As Higher Beneficiaries
Jefferies expects banks with a higher share of External Benchmark Lending Rate (EBLR)-linked loans and manageable domestic loan-to-deposit ratios to benefit.
Private banks such as ICICI Bank and Kotak Mahindra Bank are among the higher beneficiaries identified by the brokerage because of their higher EBLR loan exposure and manageable LDRs.
PSU banks could also benefit from higher rates despite having a lower share of EBLR-linked loans. Jefferies points to their lower LDRs and lower baseline return on assets, while noting that higher ECL provisioning and wage-hike negotiations remain potential earnings headwinds.
HDFC Bank and Axis Bank fall into the mid-range beneficiary category, given their higher EBLR exposure but relatively higher LDRs or greater reliance on wholesale deposits.
Why Jefferies Prefers Banks Over NBFCs
The rate-hike cycle could be less favourable for smaller private banks and NBFCs, according to Jefferies.
These lenders have a higher proportion of fixed-rate or internally benchmarked loans, meaning their loan yields may not reprice as quickly when policy rates rise.
Within NBFCs, however, the impact will still vary. Prime HFCs such as LICHF and BHFL, along with diversified NBFCs such as ABCAP, could benefit where floating-rate assets exceed floating-rate liabilities.
On the other hand, MMFS and SBI Cards could face greater pressure from higher rates.
Rate Hikes Could Trigger Earnings Upgrades
Jefferies estimates that if a 75-basis-point rate increase flows through to yields based on banks' EBLR exposure, and banks retain 15% of that benefit, it could result in earnings upgrades.
For PSU banks, such a benefit could also help offset pressure from wage increases and ECL transition, the brokerage said.
This potential earnings improvement is central to Jefferies' preference for banks over NBFCs and regional financials.
Life Insurers Could Face A Different Impact
The rate-hike and liquidity-tightening cycle may be slightly less favourable for life insurers.
Jefferies expects higher short-term rates to flatten the yield curve, making it less steep. This could reduce some of the benefits that life insurers derive from a steeper curve.
Indian Banks Could Outperform Global Financials
Jefferies also sees the rate cycle as a potential catalyst for the relative performance of Indian banks.
The brokerage noted that Indian banks have underperformed global banks by 55 percentage points over the past two years, while global peers benefited from improving growth and margin expectations.
Looking ahead, consensus estimates for 2027 indicate that Indian financials are expected to deliver stronger earnings growth than global financials, which could support their relative performance. Amid this backdrop, Jefferies' large-cap bank picks remain ICICI Bank, SBI and Axis Bank.
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