India's financial stocks fuel Nifty 50's March comeback, set for strong FY2026
March 28 (Reuters) - Shares of India's financial services sector companies recovered in March, leading the benchmark Nifty 50 index's comeback from a historic downturn and setting the stage for a robust fiscal year 2026.
With the Reserve Bank of India's interest rate cuts looming, credit growth surging, and foreign inflows returning, financials are once again the market's hottest bet.
Potential rate cuts and liquidity injection by the central bank are likely to improve the overall credit and deposit environment and earnings for banks in FY2026, Anand Rathi Research's analyst Kaitav Shah said.
Financials (.NIFTYFIN), opens new tab, accounting for 37% weight in the Nifty 50 (.NSEI), opens new tab, jumped about 9% in March after three straight monthly losses. It helped the NSE benchmark index reverse losses in the fiscal year, after about $1 trillion in investor wealth was wiped out during a downturn in the second half. The Nifty 50 had touched a record high in September.
In FY2025, financials gained nearly 20% and banks (.NSEBANK), opens new tab rose 9%, outperforming the Nifty 50's 5% rise.
The sector has also benefited from foreign inflows, opens new tab returning in March after sustained selling.
Still, foreign portfolio investors (FPIs) have offloaded Indian shares worth a record $26 billion since October, marking the highest outflows in a six-month period, pushing benchmark indexes into a correction territory in November and the broader markets into a bear market last month.
For FY2026, the banking sector is expected to remain strong, with projected credit growth of 12-13% on strong services and retail demand.
"Since banking is the ideal proxy to economic growth, it should see better credit and deposit growth in FY2026," said Mayuresh Joshi of financial services firm William O'Neil and Company.
BNP Paribas analyst Santanu Chakrabarti echoed Joshi's sentiment. "Besides liquidity infusion, changes in non-bank lenders' risk weights, relaxed priority sector lending norms, and reduced foreign selling pressure keep our bullish FY2026 outlook intact."
The RBI is widely expected to cut rates by 25 basis points in April and again in August, easing funding costs and supporting credit expansion.
Despite FPIs selling financial stocks worth $6.7 billion in FY2025, roughly 41% of total outflows, the sector ended the year higher on attractive valuations.
The Nifty financial services index trades at a 12-month forward price-to-earnings (P/E) ratio of 20x, below the 10-month average of 20.6x, suggesting undervaluation which could lead to further investments.
($1 = 85.5850 Indian rupees)
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