The Sanjay Malhotra effect: Banking stocks rally as RBI’s liquidity push, rate cuts fuel optimism

RBI Governor Sanjay Malhotra

India’s banking stocks surged to record highs on Tuesday, buoyed by a wave of investor optimism following the Reserve Bank of India’s latest liquidity-boosting measures. The Bank Nifty index climbed to an all-time high of 55,961 on April 22, extending a six-day winning streak amid growing confidence in the sector.

The rally comes as RBI Governor Sanjay Malhotra leads a series of policy actions aimed at easing systemic liquidity and supporting credit growth, even as global economic uncertainty and trade frictions weigh on sentiment. The central bank’s back-to-back repo rate cuts, liquidity-enhancing measures, and other regulatory tweaks have helped re-ignite investor interest in banks. The rise in bank stocks, which constitute nearly 22 percent of the Nifty, has helped aid the overall rebound in the market, analysts said.

The latest salvo

One of the RBI’s latest measures includes a move that allows banks to allocate a smaller portion of retail deposits to sovereign bonds, which are typically held as a liquidity buffer. This change is expected to significantly improve banks’ liquidity coverage ratio (LCR) by around 600 basis points. In simple terms, this frees up more capital that banks can use to issue new loans.

This step comes at a critical time. India’s banking system has been showing early signs of a credit growth slowdown. As of April 4, 2025, bank credit declined sharply by 33 percent year-on-year (YoY) to Rs 18.2 lakh crore. With the new LCR guidelines, the RBI is expected to unlock as much as Rs 3 lakh crore in capital, potentially giving up to a 2 percent boost to credit growth, according to analysts.

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Macquarie estimates additional deployable liquidity at around Rs 2.5–3 lakh crore, which could translate into a 1.4–1.6 percentage point increase in credit growth for the banking sector. The firm remains optimistic about HDFC Bank and Axis Bank among traditional banks, and Shriram Finance and Mahindra Finance among NBFCs. Meanwhile, analysts at Morgan Stanley project a 1–2 percent increase in loan growth and a potential margin improvement of 2–4 basis points after the RBI’s changes are fully implemented.

The turnaround strategy

Since taking office in December, Governor Malhotra has steadily eased lending rules and worked to boost liquidity across the financial system. Since January 2025, the RBI has injected nearly Rs 7 lakh crore into the banking system through a mix of open market bond purchases, variable rate repo operations, and foreign exchange swaps. The credit environment has also been supported by reduced risk weights for NBFCs and microfinance institutions. Additionally, the RBI has announced two repo rate cuts of 25 basis points each—one in February and another in April.

Siddhartha Khemka, head of research at Motilal Oswal Financial Services, said that every liquidity-focused move by the RBI helps reduce the cost of funds across the system and supports margin expansion for banks.

“We have already seen the impact in earnings,” he noted. “ICICI Bank’s margin improved by 16 basis points, far surpassing our 4–5 bps estimate. At a time when credit demand is still sluggish, the RBI’s LCR guideline is another step in the right direction.” Khemka added that he prefers ICICI Bank among the banking names, citing its strong Q4 performance and forecasting a potential 15 percent upside in the long term.

Since the lows of April, the Nifty has rallied by more than 2,000 points. Within this move, heavyweight HDFC Bank contributed over 300 points, followed by ICICI Bank with 195 points, Axis Bank with 110 points, and PSU lender SBI with 70 points, underlining how strongly banking stocks have driven the broader market recovery.

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