Credit gowth and capital markets provide a strong foundation
Speaking to ET Now, Preethi RS said the outlook for the sector was already positive before recent geopolitical disruptions and remains so. System credit growth is on track to reach 15% for the full year in FY26, which she described as a healthy signal for lenders across the board. Capital markets are also holding up well, with derivatives activity, mutual fund flows through SIPs, and net inflows all showing signs of recovery. Even stock exchanges have benefited from elevated volatility, making them quiet performers in the current environment.
On insurance, she acknowledged two to three years of regulatory-driven turbulence but expects that phase to wind down, which should unlock value across insurance names.
Large private banks are trading near historically low valuations
One of Preethi’s more pointed observations was on the valuation derating of large private sector banks. She acknowledged that part of the derating is justified — growth rates for these banks today are structurally lower than they were a decade ago. However, she argued that the correction since recent geopolitical events has gone too far.
Using residual income models and Gordon Growth Model frameworks, her team finds large private banks trading at some of their lowest valuation levels in history — even after adjusting for lower growth expectations. “The valuations for certain banks are definitely attractive at this point of time,” she said.
Midcap banks are also worth watching
Beyond large private banks, Preethi highlighted a quiet but important trend among smaller and midcap banks. Since the RBI’s Asset Quality Review process in 2015 forced a cleanup of balance sheets, these banks have delivered three to four years of consistent execution. Many are now led by professionals who moved from larger institutions like SBI and ICICI Bank, bringing stronger systems and processes with them. Because these banks do not feature in major benchmarks, they offer genuine alpha opportunities for active fund managers.
FII outflows and rupee weakness are contra signals, not warnings
Preethi pushed back against the bearish reading of two major macro concerns — FII selling and rupee depreciation. FIIs sold just under $13 billion in March alone, and the capital account has slipped into deficit. But her team’s DSP Netra report calls these developments potential bottoming signals rather than reasons to panic.She noted that much of the net FDI weakness stems from profit-booking and IPO-related exits rather than a fundamental loss of confidence in India. As valuations normalise, she expects both FII and FDI flows to recover. She also made an intriguing broader point — if global capital begins looking for alternatives to AI-heavy portfolios, India becomes an attractive destination offering 14% to 15% compounding potential.
PSU banks have structurally improved, but private banks still lead on liability franchise
On the narrowing valuation gap between PSU and private banks, Preethi credited PSU banks with genuine improvement. Their underwriting discipline has strengthened since the corporate bad loan cycle, and they have gained retail market share in FY26 for the first time — without chasing risky unsecured lending. They are also well capitalised with clear room to grow.
However, she maintained that private banks hold a durable structural advantage through their investment in people, branch infrastructure, and liability franchises — strengths that give them a 20 to 30 year runway that PSU banks still need to match.
Her overall message was clear: across BFSI, the risk-reward is increasingly in the investor’s favour.