India's Banking Sector Poised for Strong FY27 Growth
India's banking sector is projected to experience healthy earnings momentum throughout fiscal year 2027, according to a recent report by Ashika Institutional Equities. This optimistic outlook is underpinned by sustained strong credit demand, improving deposit growth, and significantly cleaner balance sheets across the industry.
As of June 30, 2026, the banking system reported non-food credit growth at an impressive 18.6 percent year-on-year (YoY), while deposit growth stood at 13.3 percent YoY. Ashika's Chief Economic Strategist, Dr. Shubhada M Rao, expects system credit growth to maintain a robust pace, reaching approximately 15 percent in FY27, supported by broad-based demand across retail, MSME, services, and select corporate segments.
Liquidity, Deposits, and the FCNR(B) Window
Improving deposit mobilization is crucial for banks to sustain growth while upholding underwriting discipline. Ashika highlighted that the Reserve Bank of India (RBI) Governor Sanjay Malhotra's February 2026 interview emphasized banks' Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) over traditional credit-deposit ratios as key liquidity measures. Based on existing buffers, banks have an estimated 2-7 percent headroom for credit-deposit ratio expansion.
To address tightness in domestic deposit mobilization, the RBI's special Foreign Currency Non-Resident (Bank) [FCNR(B)] deposit window is expected to play a vital role. Ashika estimates inflows of US$50 billion through FCNR(B) deposits by September 2026, contributing about 1.8 percent to system deposit growth. Key beneficiaries are anticipated to include HDFC Bank, Axis Bank, SBI, Bank of Baroda, ICICI Bank, and Federal Bank, with FCNR(B) funds potentially adding 1-3 percent to their FY27 deposit growth.
Margins and Earnings Outlook
Ashika's house view suggests the RBI may implement a repo rate hike of 25-50 basis points in the second half of FY27. Such a move would primarily benefit large private sector banks with a higher proportion (50-80 percent) of External Benchmark Lending Rate (EBLR)-linked loans. Furthermore, the RBI's FCNR(B) zero-cost swap window is expected to support bank margins by providing access to lower-cost funding and easing pressures on deposit mobilization. Stronger core net interest income is projected to offset any lower treasury income, leading to healthier overall earnings growth.
Improving Asset Quality and Key Monitorables
The banking sector continues to demonstrate robust asset quality, with gross non-performing assets (GNPAs) of scheduled commercial banks at a multi-decadal low of 1.8 percent and net non-performing assets (NNPAs) at 0.4 percent as of March 2026. This improvement is attributed to contained slippages across corporate, retail, and SME portfolios, eased stress in unsecured retail and microfinance, and healthy provision buffers.
However, Ashika noted that MSME asset quality remains a key monitorable. CRIF Highmark data indicated a rise in public sector banks' Portfolio at Risk (PAR) for 31-90 days past due in the MSME segment, from 2.7 percent in March 2026 to 3 percent in April 2026.
Ashika's Top Banking Stock Picks and Price Targets
Ashika Institutional Equities maintains 'buy' ratings on several prominent Indian banking stocks, outlining the following target prices:
- HDFC Bank: Target Price Rs 1,061
- SBI (State Bank of India): Target Price Rs 1,276
- Axis Bank: Target Price Rs 1,663
- City Union Bank: Target Price Rs 280
- Karur Vysya Bank: Target Price Rs 373
Additionally, Ashika identifies Bandhan Bank (Target Price: Rs 271) and Bank of Baroda (Target Price: Rs 316) as potential 'dark horses'. Other stocks with 'buy' ratings include ICICI Bank (Target Price: Rs 1,644), IndusInd Bank (Target Price: Rs 970), Kotak Mahindra Bank (Target Price: Rs 465), Federal Bank (Target Price: Rs 377), RBL Bank (Target Price: Rs 455), DCB Bank (Target Price: Rs 233), Punjab National Bank (Target Price: Rs 115), AU Small Finance Bank (Target Price: Rs 1,216), and Equitas Small Finance Bank (Target Price: Rs 99).