Yet, in a striking divergence that underscores just how aggressively domestic money is stepping in, the Nifty Bank index has surged 14% so far this month.
During the fortnight, FIIs offloaded stocks worth over Rs 48,000 crore in aggregate, with financials bearing the heaviest brunt. Consumer services (Rs 5,336 crore), healthcare (Rs 4,481 crore), and auto (Rs 3,704 crore) also saw significant outflows. Even IT, which has rebounded from recent lows, witnessed a modest Rs 1,325 crore in selling.
With 2026 expected to be an El Niño year and ongoing disruption in global supply chains, domestic brokerage firm Prabhudas Lilladher has warned that the resilience of the banking system will be tested in coming quarters.
NIM (net interest margin) expansion looks unlikely, according to the brokerage. Bulk deposit rates have started to harden, and despite repo rate reductions, 10-year G-Sec yields have actually risen in recent months. Credit card growth has slumped to just 1.7%, and durables credit has contracted by 9.8%, showcasing cracks in consumer demand.
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That said, the brokerage remains overweight on banks, noting that credit growth has rebounded from a trough of 9% in June 2025 to around 14.3% currently, led by MSMEs (27.5%), vehicle finance (20.9%), and NBFCs (17%). It has increased portfolio weights on Kotak Mahindra Bank and HDFC Bank by 40 basis points each, betting that frontline lenders will prove more resilient if the Gulf conflict prolongs.For many domestic fund managers, FII selling has eased valuations in their preferred bank stocks.
“If I had to choose one large sector, I believe financials will lead the market, driven by strong earnings supported by reasonable valuations,” said Aditya Khemani, Fund Manager–Equity at Invesco Mutual Fund. His fund is overweight across the board—lending entities such as banks and NBFCs, as well as non-lending segments including capital markets intermediaries and insurance companies.
Global brokerage BNP Paribas argues that two to three quarters of slower or more measured growth appear to have already been priced in on an incremental basis, and that starting valuations were not stretched for preferred large private banks.
“We like the risk-reward at current prices, and only a meaningful economic shock from a prolonged disruption could materially change the outlook,” BNP Paribas said.
Tata Mutual Fund sees FY27 as an upgrade cycle for banks, projecting 15-20% earnings growth, aided by a recovery in credit growth, benign asset quality, and a rebound in NIMs after what it expects to be a bottom in FY26.
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It notes that large private sector banks have already undergone one leg of re-rating. While faster rate transmission on liabilities and easy liquidity will create a transient NIM dip, and while asset quality risks from unsecured loans and microfinance remain a concern, Tata MF characterises current valuations as “fair” with room for positive earnings surprises in FY27.
However, despite optimism from domestic funds, FII selling will remain a drag on bank stocks, given the dominant shareholding of FIIs.
(Data: Ritesh Presswala)