Nifty Bank index outlook as Indian deposit growth slows

The Nifty Bank index has struggled this year as it underperformed the broader Nifty 50 index. The index started the year at INR 48,250 and then retreated to ₹44,423 in January. It has rebounded by over 6.8% from its lowest point this year as bulls attempt to move above its YTD high.

The Nifty Bank Index is one of the most popular gauges in the Indian market. It tracks twelve of the biggest and most liquid banking companies in India. The biggest companies in the index are SBI Bank, HDFC, ICICI, and Kotak Mahindra.

Indian banks are benefiting from the strength of the country’s economy and high-interest rates. Recent data revealed that the economy expanded by over 8% this year. Economists at Moody’s, S&P Global, and JPMorgan have all boosted their forward estimates for this year.

The Reserve Bank of India (RBI) has also left interest rates unchanged at 6.50% and analysts expect that it will start cutting in Q3. It has left rates steady at this rate since February last year, with inflation sitting between 2% and 6%. 

Banks benefit from high-interest rates because of the substantial net interest income (NII). For example, Axis Bank said that its third quarter rose to Rs 6,493.3 crore, up by 4% from the same period in 2022.

The biggest challenge for these Indian banks is that the companies are seeing a sharp decline in deposit growth. A report by S&P Global noted that only Punjab National Bank increased its Net Interest Margin (NIM).

State Bank of India (SBI), on the other hand, reported weak earnings. Its net income came in at 91.6 billion rupees, missing estimates of 113 billion rupees. It also boosted its pension liabilities provisions, hitting its profitability.

Further, Indian banks have faced pressure after the Reserve Bank of India barred them from investing in alternate investment funds (AIFs). The goal is to prevent loan evergreening, a situation where banks give fresh loans to avert default on existing ones. 

The Nifty Bank Index constituents have diverged this year. HDFC Bank shares have retreated by 14% this year while Kotak Mahindra fell by 5.80%. On the other hand, ICICI Bank stock rose by 10% while SBI jumped by 18%.

Nifty Bank index chart by TradingView

Technically, the Nifty Bank index has risen above the 50-day and 100-day Exponential Moving Averages (EMA). The Relative Strength Index (RSI) has drifted upwards and has moved above 60. 

Therefore, the outlook for the index is mildly bullish, with the next level to watch being the YTD high of INR 48,660, its highest point in December. This price is about 2.50% above the current level.

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