Should you buy, sell or hold banking stocks after Feds monetary easing cycle begins?

As was already price in by many analysts, Federal Reserve delivered the much-anticipated interest rate cut on Wednesday. While the stance as a whole has been positive across gold, equities and other commodities lifting them to new highs, experts the move to weigh on listed banks in the near term.

Remember the easing cycle took off after a long gap of four years. The last time the US economy resorted to an emergency rate cut during Covid on March 16, 2020 and the rate cut of this scale i.e. 0.5 per cent eas first taken on to on September 18, 2007.

Also read: What Zee Business Managing Editor makes of the Fed rate cut?

Dnyanada Vaidya, Research Analyst - BFSI, Axis Securities said, "We expect a change in stance in the upcoming meeting acting as a precursor for a possible rate cut by end of CY24 by the RBI. A rate cut would result in near-term pain on NIMs for lenders with higher share of external benchmark-based lending rate (EBLR)/repo linked loans.

However, for banks with higher share of fixed-rate loans and certain PSU banks with higher share of MCLR-linked loans, the quantum of margin compression would be lower, added.

Vaidya held that beneficiaries amongst smaller banks could be AU Small Finance Bank while in the PSU pack SBI and Bank of Baroda are likely to see lower NIM compression, 

Credit growth for banks would be largely an outcome of deposit growth. We expect deposit growth to improve in the coming quarters thereby supporting healthy credit growth for banks. Amongst the banks under our coverage, we prefer ICICI Bank, SBI and Federal Bank, noted Vaidya.

Meanwhile, Raj Gaikar, Research analyst, SAMCO Securities noted as RBI is now expected to follow suit, it would serve as a catalyst for Indian Banks, lowering their funding costs and enhancing profitability. Lower interest rates will drive credit growth as businesses and individuals tap into more affordable borrowing options, attracting fresh demand for loans.

On the flip side, Anshul Jain, Head of Research, Lakshmishree Investment & Securities believes the US Federal Reserve’s recent rate cut is likely to have a significant impact on Indian banks and the broader financial market and Indian banks stand to gain on the move.

Margin compression and liquidity concerns to still persist

However, the downside is the compression in Net Interest Margins (NIMs), as lending rates fall faster than deposit rates. Additionally, with deposit growth already lagging, lower rates on deposits could further slow down inflows in the form of Deposits, raising liquidity concerns.

Private sector available at compelling valuations

A lower interest rate in the US often encourages investors to move capital into emerging markets like India, seeking higher returns. With reduced yields on US Treasury securities, foreign investments in Indian equities and debt markets may increase, benefiting sectors like banking, added Jain.

He added that banks in India will benefit  from the influx of foreign capital, leading to an improved liquidity position. Additionally, a rate cut in the US could ease global borrowing costs, allowing Indian banks to access cheaper funding from international markets. This could improve margins and profitability, particularly for those banks with global exposure or international fundraising needs.

However, the Reserve Bank of India (RBI) may adopt a cautious approach in response. Governor Shaktikanta Das has emphasized that India will not automatically mirror the Fed’s actions, focusing instead on domestic economic stability. While a Fed rate cut opens the door for capital inflows, the RBI’s careful stance ensures that any monetary policy adjustments will align with India's inflationary concerns and growth outlook.