From FIIs to local residents, everyone is investing in financial stocks as lenders avoid a direct hit from US tariffs

According to data from the National Depository for Securities, foreign portfolio investors pumped USD 1.5 billion into shares of the banking and finance sector in October. This was the highest inflow into the segment in six months and a sharp retreat after FPIs withdrew $2.66 billion in August.

“The sell-off in August was mainly driven by the announcement of U.S. tariffs, which opened a can of uncertainty,” said Trupti Agrawal, fund manager at WhiteOak Capital AMC. While sectors including seafood and textiles are highly dependent on the United States, she noted that banking is not directly affected, although second- or third-order effects are possible.

The renewed interest from foreign portfolio investors comes at a time when the Indian banking sector has quickly climbed to the top of the wish lists of global segment investors. And this is not a temporary inflow of FPI, but long-term, strategic capital in which foreign investors take over controlling stakes and seats on management boards, which proves a strong belief in the potential of the industry, Mint reported earlier this week.

Dubai Emirates NBD bought ₹Last month, a majority stake of Rs 26,850 crore ($3 billion) in RBL Bank was the largest-ever FDI in Indian banking. This followed Japan’s Sumitomo Mitsui ₹₹16,333 crore investment for 24.2% stake in Yes Bank. In October, Blackstone gained 9.9% in Federal Bank for ₹6,196 crore, while in April, Warburg Pincus and ADIA invested up to ₹7,500 crore for 15% stake in IDFC First Bank.

Investor interest in the sector is evident from the outperformance of the Nifty Bank and Nifty Financial Services indices compared to the Nifty 50. The banking indices are up 16% and 14%, respectively, compared to the Nifty 50, representing an 8% gain so far in 2025. Most stocks in the Nifty Financial Services index are trading below their five-year average multiple, according to Capitaline data.

Customs duties on textiles

There have been some concerns over banks’ exposure to the textile hub in Tamil Nadu. However, Karur Vysya Bank and City Union Bank – both based in Tamil Nadu – have clarified that their exposure to the sector is less than 2%. According to Agrawal, State Bank of India has similar exposure.

B. Ramesh Babu, managing director and CEO of Karur Vysya Bank, said in an Oct. 17 call with analysts that the impact of U.S. tariffs on the lender’s portfolio is negligible.

City Union Bank Executive Director R. Vijay Anandh, in a conference call on November 3, clarified that the lender does not anticipate any increase in asset quality pressures in the context of US tariffs. He emphasized that exposure to US exports constitutes 0.27% of the bank’s loan portfolio. The most important element was the textile segment.

WhiteOak’s Agrawal noted that sentiment improved in September following the rationalization of goods and services tax rates just before the festive season, especially in the automotive sector. The new rates stimulated demand for cars and scooters, which customers most often buy by taking out loans.

“Bajaj Finance has even mentioned that the momentum has continued after the festive season. So, the second half looks good overall,” she said.

Home money

It’s not just the return of global money – domestic investors are also joining in.

Bajaj Finserv AMC has introduced a new funds offer in banking and financial services which will open on November 10 and will end on November 24. Another fund is preparing to launch a similar offering, said a person familiar with the plan Mint.

The financial sector is a beneficiary of improving liquidity in the country, aided by the dovish stance of the regulator, said Hiten Jain, equity fund manager at Invesco Mutual Fund.

Over the last 9-12 months, the Reserve Bank of India has reduced the cash reserve ratio for banks by 100 basis points and the key repo rate by 100 basis points, besides taking steps to boost liquidity in the face of a steady decline inflation. Moreover, the government is trying to boost consumption by providing income tax breaks and GST cut, Jain said.

“This has led to an increase in domestic credit growth to 11.4% year-on-year from a low of 9% a few months ago. Concerns over asset quality in retail lending have also eased. All this is driving renewed interest,” he said.

Sorbh Gupta, chief equity officer at Bajaj Finserv AMC, explained that historically, during times of economic recovery, credit growth tends to accelerate, which causes the banking, financial services and insurance (BFSI) sector to outperform other sectors and the broader market.

“Bank fund returns are closely linked to the pace of economic activity,” Gupta said.

Executives at State Bank of India, the country’s largest lender, have expressed confidence that they will grow faster than the industry as a whole, forecasting lending growth of 12-14% in fiscal 2026 and aiming to double its balance sheet every six years.

Appraisals, re-evaluations

Historically, credit growth has been about 1.2 times the growth rate of nominal GDP, which currently stands at 10-11%. According to Invesco’s Jain, credit sector stocks are trading below their long-term average valuations, suggesting the possibility of a re-rating.

“This translates into an expectation of a return of around 13-15% in this area,” Jain said.

Private banks are trading below their long-term average valuations, while public sector banks are trading closer to their historical average valuations. Valuations of non-bank financial companies vary depending on performance. In his opinion, the market in the non-credit financial space is trading largely above long-term averages, but is still in the earnings growth cycle.

According to Harsh Gupta Madhusudan, fund manager at Ionic Asset, as the dollar cycle gradually reverses, tariffs rationalize and India rejoins the broader emerging markets story, the financial sector, especially large lenders, would be among the first to benefit even if they do not see the maximum percentage growth.

“Compared to the broader market and based on the last two decades of data, the undervaluation of large-cap lenders is approximately 15%,” he said.

The financial services space has become more diverse, with asset management companies, brokerages, exchanges and insurers now part of the mix. WhiteOak’s Agrawal pointed out that public and private banks combined account for less than 60% of the Nifty Financial Services Index, while almost 40% comes from capital market plays such as fintech, insurance and asset management, offering investors more opportunities to participate.

Of the 20 stocks in the Nifty Financial Services index, only five are banks – private and public – while the rest are power financiers, gold loan providers, NBFCs, insurers, fintech payments companies and capital market players.

She said that despite the outperformance, shares of Nifty Financial Services and Nifty Bank are still attractively valued.

“Most financial services companies have ROE in the mid-teens, and without further reduction in baselines, returns in this area could be in the mid-teens over the next 3-5 years,” she said. “Multiple re-evaluations could result in even greater gains.”

WhiteOak launched its financial services fund in January, when the topic was no longer popular. It has since delivered 15.5% returns on the regular plan and 17.5% on the direct plan.

The way forward

The medium-term outlook looks promising, with reduced corporate stress and a significant reserve buffer, said Sanjay Agarwal, senior director at CareEdge Ratings. Overall lending growth is showing signs of a gradual, sequential recovery, with all segments showing gradual month-on-month growth since September.

“We expect FY26 credit utilization to be 11.5-12.5% ​​YoY, trending towards the upper end,” he said.

Agarwal said there is a slowdown NBFCs Weak retail lending is expected to be offset by strong policy tailwinds, festive season demand, favorable monsoons, GST rate cuts, growth in SME lending and shift of borrowers from the bond market to banks in Q2.

However, high interest rates and global uncertainty, including the US tariff situation, could hurt credit growth, while lower inflation could also reduce demand for working capital.

With weakening treasury earnings and margin pressure likely to continue in the second half of FY26, banks are expected to focus more on core performance and operational efficiency to maintain profitability. He noted that further improvement may depend on a stronger recovery in distressed retail and microfinance portfolios, higher fee income and tighter cost controls.