Banks vs NBFCs: Which stocks could benefit as RBI set to hike rates for the first time in 3 years?

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) began its three-day meeting on Monday amid growing expectations of the central bank’s first interest rate hike since 2023. Investors are increasingly betting that policymakers will begin tightening policy as inflation quickens, growth remains resilient, and major central banks turn more hawkish.

With inflation running above the RBI’s target and markets already pricing in higher borrowing costs, the central bank’s decision and guidance will be closely watched for signals on the trajectory of rates and capital flows. A benign inflation backdrop earlier in the year had given the RBI room to hold rates even as the Iran war drove oil prices higher, but inflationary pressures have since broadened beyond food and fuel.

For banks and non-banking financial companies (NBFCs), the impact of a rate-hike cycle could differ significantly depending on their funding profile, asset mix and ability to reprice loans.

RBI rate hike and NBFCs

Foreign brokerage Nomura expects a shallow 50-basis-point rate hike cycle during October-December 2026 and has revisited its cost-of-funds assumptions for covered NBFCs for FY27-29. Its scenario analysis assumes the entire 50-60bp increase comes in October, lifting funding costs from the third quarter of FY27, while NBFCs pass on the increase to customers only from FY28. Under this scenario, Nomura expects a 1-8% hit to FY27 earnings per share for its covered NBFCs. As lending rates begin to rise from FY28, the impact on earnings is expected to diminish through FY28-29.

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Despite the near-term pressure, Nomura said the structural earnings outlook for NBFCs remains healthy, with FY27-29 EPS compounding estimated at around 16-28%. The brokerage believes the structural strengths of NBFCs remain intact even in a rising-rate environment.

A key factor is the asset mix. Many diversified NBFCs have a healthy share of floating-rate assets, while lenders with fixed-rate loans typically have shorter tenures. This, according to Nomura, should help keep profitability healthy through FY27-29.

Nomura, however, flagged recent regulatory developments as a bigger concern than the rate-hike cycle. These include insurance distribution reforms affecting credit-life insurance policies offered by covered NBFCs and regulatory hesitation around flexi loans. Among diversified lenders, Nomura prefers Bajaj Finance, Tata Capital and L&T Finance, while Shriram Finance is its preferred vehicle financier. It also expects housing financiers to be comfortably placed in a rising-rate environment and has a Buy rating on Aadhar Housing Finance.

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The immediate pressure on NBFC funding costs is already visible. Motilal Oswal said incremental cost of funds continued to rise in the second quarter of FY27, particularly for lenders more reliant on market borrowings, as bond yields remained elevated amid geopolitical uncertainties.

The brokerage said evolving inflation dynamics, including food inflation, weak monsoons and geopolitical developments, could prompt the RBI to raise the repo rate in upcoming MPC meetings, potentially putting further pressure on NBFC borrowing costs.

NBFCs liquidity boost

The liquidity backdrop, however, could provide some cushion. Nuvama Institutional Equities said the sharp improvement in banking-system liquidity following strong FCNR mobilisation could eventually flow through to NBFCs and provide another boost to credit growth. The benefit, it said, could be more pronounced for small and mid-sized NBFCs such as Aye Finance, which typically operate with tighter funding access and higher funding costs.

Nuvama said the liquidity surplus could delay margin compression and support faster AUM growth even if the RBI embarks on a shallow 50bp rate-hike cycle. It therefore sees FY27 as potentially a healthy growth year for most NBFCs with scalable franchises and diversified product portfolios.

But the brokerage also sees the asset-liability management mix as a key factor separating winners from laggards as the rate cycle progresses. While the liquidity surplus could delay or moderate the impact, funding costs could rise as liquidity normalises and eventually pressure margins from FY28.

NBFCs with a higher share of floating-rate assets, particularly mortgage and MSME/business loans, funded through relatively stable or fixed-rate liabilities should be better placed to absorb rate hikes, according to Nuvama.

Its analysis points to Bajaj Finance, Tata Capital and mortgage-heavy Piramal Finance as relatively more margin resilient. Shriram Finance, backed by strong liquidity, is also expected to be relatively resilient on margins and the impact on fees and earnings from insurance commission capping.

On the other hand, Mahindra & Mahindra Financial Services, SBI Cards and Muthoot Finance could be more vulnerable on margins, while L&T Finance faces pressure from insurance commission capping. Nuvama said it is trimming earnings estimates and target prices for these lenders.

How are banks positioned?

For banks, Nomura expects the credit outlook to strengthen into the second half of FY27, raising its FY27 system loan growth estimate to around 17% year-on-year from 15%.

The brokerage expects second-quarter FY27 results to show high-teens loan growth with stable asset quality and sees the momentum continuing through the second half of the financial year. With FCNR(B) inflows removing the funding constraint, banks are expected to deploy excess liquidity into loans and retire high-cost liabilities.

Margins, however, could remain under pressure in the near term as banks hold surplus FCNR(B)-led liquidity in low-yielding assets. Nomura expects this pressure to ease by the third quarter of FY27 as the excess liquidity is deployed into loans and used to retire expensive liabilities.

A repo rate hike could then support net interest margins, particularly for banks with a higher share of floating-rate loans.

Against this backdrop, Nomura has added HDFC Bank to its top picks after the RBI approved Anup Bagchi as MD & CEO from October 27, 2026.

Nomura’s preferred large banks are HDFC Bank, Kotak Mahindra Bank and ICICI Bank, all rated Buy. Among mid-tier banks, it prefers IDFC First Bank and IndusInd Bank, also with Buy ratings.

RBI rate hike cycle outlook

Nomura now expects the RBI to begin its tightening cycle with a 25bp rate hike in the October 2026 policy. The policy backdrop has turned more hawkish, with global central banks also beginning to raise rates amid renewed inflation and energy-price pressures.

The RBI has already started withdrawing surplus liquidity, including Rs 1 trillion of OMO sales, alongside continued liquidity-management operations. With domestic growth remaining resilient and inflation risks building, Nomura expects the central bank to gradually tighten policy.

Motilal Oswal expects a 25 bps hike in October and said that if crude prices remain above $100 a barrel for a sustained period, there could be scope for cumulative rate hikes of 75-100bp.

For lenders, the emerging rate cycle therefore points to a mixed impact, with the asset-liability mix, floating-rate exposure, funding profile and repricing ability expected to determine how individual banks and NBFCs navigate higher borrowing costs.

With the RBI’s rate decision and guidance now in focus, the impact on lenders will depend on how quickly borrowing costs rise and how individual banks and NBFCs manage funding costs, loan pricing and margins. While analysts expect the initial rate-hike cycle to be shallow, the pace and extent of further tightening will remain key factors for the earnings outlook across the sector.

Disclaimer: This article has been written by Veer Sharma, who is not a SEBI-registered Research Analyst or an Investment Adviser. Veer Sharma and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.