The trend then extended to RBL Bank, which received funds from Emirates NBD in terms of the acquisition of a majority stake, and most recently to Federal Bank, which saw an infusion from Blackstone. In all, these deals represent over $6 billion of fresh foreign capital flowing into India’s private banking sector over the past few months.
While part of this could be attributed to the RBI’s increasingly favourable stance toward foreign ownership in banks, the larger takeaway is a renewed global interest in India’s private banking space. This surge in inflows can be viewed from two distinct lenses — the short-term tactical and the structural long-term perspectives.
In the short term, the sector had been underperforming for a while. Following the last quarter of FY25, concerns over slippages and rising credit costs in unsecured and micro-lending segments led to a sharp de-rating of private banks. That, in turn, created attractive entry valuations.
Now, however, the tide seems to be turning. Most private banks’ recent results indicate declining slippages, moderating credit costs, and accelerating loan growth, accompanied by encouraging commentary across retail, SME, and microfinance portfolios. The setup, therefore, looks much more constructive, making the current valuation attractive.
From a structural standpoint, the story is even more compelling. With consumption expected to revive on the back of GST rationalisation, income-tax relief, and the RBI’s expected easing of rates, and with private capex showing early signs of revival, the long-term growth runway for banking as a sector appears stronger than ever.FDI inflows, in many ways, are often precursors to broader institutional participation. If history is any guide, this renewed foreign investor interest could soon translate into a meaningful comeback of FIIs into India’s private banking space.For evidence that investor interest is returning to the banking sector, one needn’t look beyond the divergence between the Bank Nifty and the benchmark Nifty. The former has surged well past the highs it scaled last September, while the latter continues to struggle to break its previous peak. There may still be scepticism around Nifty’s breakout potential, but there are no such doubts when it comes to its banking cousin, the Nifty Bank index.
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The question now is not whether the Bank Nifty will hit new highs, but whether it can provide leadership to the next leg of the rally. This is the second time since April that the index has attempted to scale lifetime highs. Back in April, a burst of optimism around potential RBI rate cuts had triggered a rally in banking stocks, propelling the index beyond its 2024 peak – only for it to lose momentum soon after.
Now, once again in October, the Nifty Bank index is trading at record levels even as the broader Nifty still lags its all-time high from late last September. But this time, the breakout could be for real. The reason for the increased confidence is due to emerging tailwinds for the sector listed below.
With deposits repricing, the overall trajectory for NIMs (Net Interest Margin) is
positive.
With declining slippages, the credit costs are likely to moderate.
With rate-cut transmission near completion, credit growth is likely to accelerate
on a narrowing spread with the corporate bond rates.
With the worst of the stress behind in the unsecured and micro-finance book,
profitability is likely to look up for the entire sector in general.
With the early signs of revival in private capex, growth from corporate loan book
could surprise on the upside.
Among all the factors driving optimism around credit growth, the one that could have a disproportionate impact is the revival in private capex. Unfortunately, that’s also where investor confidence remains the weakest. The hesitation stems from the elusive nature of private investment cycles – after witnessing several false starts in the past, investors are understandably waiting for clear and sustained evidence before drawing any favourable conclusions.
The recent rebound in private investments, as reported by Business Standard, shows that the value of new private project announcements nearly doubled in the second quarter of FY26. While this is an encouraging development, it still needs to be viewed with cautious optimism. Only time will tell whether this is yet another false dawn or a genuine turnaround.
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That said, this time around, the macro backdrop looks more supportive. The boost to consumption from recent GST cuts, coupled with an expected revival in rural demand-fuelled by the first meaningful uptick in rural wage growth in many years – could provide the much-needed fillip for private investments to gain traction and sustain momentum. In summary, there are reasons to believe that the time has come for the banking pot to brew hot!
(The author is Founder, CEO & Fund Manager, TrustLine Holdings)