Indian bank credit hits two-year high as IT sector finds floor

India’s first-quarter earnings season is opening on a constructive note, led by a turnaround in the banking and IT sectors which lagged in the previous fiscal year. According to Vinod Nair, Head of Research at Geojit Investments Limited, initial business updates indicate resilience as the new financial year begins.

The banking sector is underpinned by a sharp acceleration in credit. Reserve Bank of India data through mid-June shows system credit growth reached 17.7% year-on-year, the fastest pace in two years, outpacing deposit growth of 12%. This loan momentum is broad-based, spanning services, MSMEs, industrial clients and secured retail. Private banks are better positioned, balancing loan and deposit growth while maintaining net interest margin resilience, whereas public sector banks are struggling to mobilise deposits despite robust credit expansion. NBFCs are contributing to the strength, driven by gold loans and vehicle financing.

For the full fiscal year, bank earnings are projected to grow between 7% and 11%. Nair expects slight margin compression in the first half due to a shift toward secured loans, intense competition and elevated funding costs, followed by stabilisation in the second half. The valuation backdrop offers a clear entry point: the Nifty Bank index trades at a blended forward price-to-book ratio of 1.51x, well below its five-year average of 1.99x. However, investors must monitor external risks, including the West Asia conflict, inflation headwinds, and potential El Nino impacts on rural delinquencies.

The IT sector presents a more nuanced picture. Underlying demand remains soft, with sector leaders expected to report flat sequential constant-currency growth. Yet, currency dynamics are providing a significant buffer. Rupee depreciation is forecast to lift Nifty IT index INR revenues by roughly 14% year-on-year, up from 5% a year ago, while expanding EBITDA margins by about 30 basis points even as the broader Nifty50 faces margin contraction of 100 to 150 basis points.

Looking ahead, the worst of the IT downturn may be passing as corporate discussions move beyond AI experimentation toward large-scale deployment. Companies are actively pursuing acquisitions to build AI capabilities and enter new markets, while anticipated US monetary easing could eventually revitalise technology budgets. Trading at roughly 16 times one-year forward earnings, the Nifty IT index has de-rated enough to attract long-term investors positioning for a spending recovery over the next 12 to 24 months.