Roaring Financials Ensure India's Nifty Recovery Shrugging off Tariff Worries

The Nifty Bank index has emerged as a bright spot in India’s equity landscape, defying broader market headwinds and tariff-induced global uncertainties. While the Nifty 50 and Nifty 500 indices stumbled by 0.9% and 5.1%, respectively, in Q1 2025, the Nifty Bank managed a 1% gain, outperforming all but the volatile Nifty Metals. This resilience, however, masks a fractured reality: the gains were fueled almost entirely by four private sector titans—ICICI Bank, Axis Bank, HDFC Bank, and others—while eight smaller players in the index declined.

The Dual Reality of India’s Banking Sector

The banking sector’s performance is a tale of two halves. The top four banks, leveraging aggressive loan growth and robust fee income, drove the index higher. ICICI Bank, for instance, maintained a blistering 17% CAGR in loans since 2021-22, while HDFC Bank capitalized on tech-driven efficiency gains. In contrast, the remaining banks struggled with weak deposit inflows, rising provisioning costs, and a loan-to-deposit ratio (LDR) of 80.5%—a sign of overextension. Six of these banks underperformed even the broader Nifty 500, highlighting systemic vulnerabilities.

The root causes are structural. Deposit wars have forced banks to hike term deposit rates to attract liquidity, squeezing net interest margins (NIMs). Meanwhile, microfinance and unsecured retail loan stress have slowed credit growth, with delinquencies pushing up credit costs. Analysts at Motilal Oswal and IIFL Capital project NIMs to remain “muted” in Q1 2025, as the Reserve Bank of India’s (RBI) repo rate cuts fail to offset deposit rate stickiness.

RBI Steps In, But Uncertainties Linger

The RBI’s April 2025 rate cut—25 bps to 6%—marked a pivot to accommodative policy, driven by tariff-related global risks. U.S. tariff disputes, which threaten export competitiveness and manufacturing demand, prompted the central bank to lower borrowing costs and stabilize credit demand. Analysts like Sanjay Agarwal of AU Small Finance Bank noted India’s relative insulation but warned of “second-order effects” from a potential global slowdown.

Yet markets reacted cautiously. The Nifty PSU Bank index fell 2.48% on the rate cut announcement, reflecting skepticism about how much relief borrowers would actually receive. Vikas Gupta of OmniScience Capital highlighted a deeper concern: India’s INR depreciation, which erodes export competitiveness even as crude prices ease.

Bank-Specific Outlooks: Winners and Losers

• ICICI Bank: Analysts at Motilal Oswal see a path to a 17% RoE by 2026-27, buoyed by tech investments and treasury gains. Its loan growth and asset quality improvements offer a buffer against margin pressures.
• Axis Bank: Near-term struggles loom. Weak deposit growth and capital adequacy concerns (capital to risk-weighted assets ratio below peers) may force capital raises, dampening returns.
• State Bank of India (SBI): Leveraging its dominant MCLR-linked loan portfolio, SBI has insulated margins better than peers. Ambit Capital praises its fee income stability and ability to compete with private banks.

Tariff Risks and the Road Ahead

While tariff-related volatility remains a wildcard, the RBI’s actions and upcoming catalysts suggest a gradual recovery. Open market operations and forex swaps aim to boost liquidity, easing deposit competition. Meanwhile, loan repricing and government capex-driven consumption could lift margins starting H2 2025-26.

Crude prices at $70/barrel and inflation easing to 4% in FY26 create room for further rate cuts—potentially 50-75 bps by year-end. This would benefit borrowers and banks alike, though the latter must navigate sticky deposit rates.

Conclusion: Banking on Resilience

The Nifty Bank’s Q1 gains underscore a critical truth: India’s financial sector is both the engine and the Achilles’ heel of the economy. While structural challenges like deposit wars and loan stress persist, the RBI’s pivot and sector-specific strengths (e.g., SBI’s diversification, ICICI’s tech edge) position banks to lead a recovery.

With H2 2025-26 poised for margin normalization and liquidity improvements, investors should focus on banks with robust capital structures and fee income streams. The Nifty’s resilience isn’t a blanket endorsement of the sector—it’s a call to separate the roaring lions from the lagging lambs.

In a world of tariff-induced uncertainty, India’s financial giants are betting on agility—and investors would do well to follow their lead.