Explained - The key factors behind the rally in banking stocks on Tuesday

India's banking stocks are lending support to the market on Tuesday, June 9, with the Nifty Bank index outperforming the benchmark Nifty 50 index. All constituents of the Nifty Bank are trading with gains on Tuesday.

Along with the Nifty Bank, the Nifty PSU Bank index is also trading with gains of 0.9% with all of its constituents trading with gains as well.

Why Are Banking Stocks Gaining On Tuesday?

The Reserve Bank of India (RBI) has introduced a specialized Standard Operating Procedure (SOP) for Foreign Currency Non-Resident (FCNR(B)) deposits and External Commercial Borrowings (ECBs). As part of this move, the RBI has also expanded the scope of its ECB scheme, allowing not just Public Sector Undertakings (PSUs) but all banks to raise foreign currency borrowings.

To incentivize these inflows, the central bank has introduced a strategic swap mechanism, effectively offering a subsidy of 1.5%, thereby covering nearly half of the total hedging costs for participants.

Why Is The RBI Move Positive For HDFC Bank?

Market analysts, including those at brokerage firm Citi, view this as a major positive for the banking sector, particularly for lenders like HDFC Bank that maintain a high loan-to-deposit ratio. By lowering the cost of carry, the RBI is essentially providing banks with a more attractive window to bolster their foreign currency liquidity.

RBI's FCNR (B) Scheme

Simultaneously, the RBI has provided crucial clarity regarding the FCNR(B) scheme, explicitly permitting banks to extend loans against these deposits. This regulatory green light facilitates a "leverage effect," enabling non-resident depositors to make substantial investments using minimal own-funds.

Under this structure, market dealers estimate that savvy depositors could potentially yield returns in the range of 12% to 15% on such deposits, significantly outperforming traditional fixed-income avenues.

Projections suggest that the influx from these schemes, encompassing both ECBs and FCNR(B) inflows, could realistically reach the $50–$70 billion range. As liquidity conditions tighten globally, this proactive SOP is expected to provide a vital buffer, ensuring banks have adequate resources to support domestic credit demand while maintaining stability in the broader financial ecosystem.

Stock Reactions

Shares of Punjab & Sind Bank and Bank of Baroda are the top gainers on the PSU Bank index, trading with gains of around 1.5%, while IDFC First Bank is among the top gainer on the Nifty Bank index, trading 4% higher after brokerage firm HSBC initiated coverage of the stock.

The Nifty Bank is now trading with gains of nearly 650 point, and is now trading near the crucial resistance zone of 54,800.