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Private banks better placed on anticipated rate hikes, while MDR add to earnings

ICICIdirect Research 18 Sep 2026 DISCLAIMER

The Fed’s latest rate hike increases the probability of the RBI following with a tighter policy stance, particularly if external-sector and currency pressures persist. A domestic rate hike would be incrementally favourable for banks, with private banks likely to benefit more given their relatively higher EBLR-linked loan mix of ~55–60% of advances. Since EBLR-linked loans reprice almost immediately with changes in the policy rate, lending yields should move up faster, while repricing in deposit is expected to follow after a lag amid ample liquidity in the system, creating scope for near-term NIM expansion.
PSU banks, with a relatively higher share of MCLR-linked / fixed rate loans, could see the benefit flow through more gradually as repricing occurs over subsequent reset cycles.
Part of the asset-side benefit, however, could be moderated by the accompanying rise in government bond yields up 30 bps QoQ to 7.05%. Increase in G-sec yields would impact treasury performance amid MTM pressure, partially offsetting the incremental benefit from faster EBLR repricing. Nevertheless, the core operating impact should remain supportive as higher lending yields precede MTM impact of treasury.
Separately, the introduction of 0.4% MDR on eligible P2M UPI transactions above ₹2,000 from October 15 opens a meaningful new fee-income pool for banks. Brokerage estimates peg the potential annual MDR revenue pool at ₹15,000–18,000 crore, with banks positioned to capture majority of the incremental flow - the issuing bank receives 40% of the MDR, acquiring bank 30% and PSP bank another 10%, while the UPI app retains 20%. This implies banks could collectively capture up to ~80% of the fee pool.
 
Combining near-term NIM expansion from faster EBLR repricing with incremental MDR-led fee income, partly offset by lower treasury gains as G-sec yields rise, we estimate a ~5–7% post-tax uplift to banking-sector PAT on a blended basis, with private banks likely to see a relatively stronger near-term margin benefit given their higher EBLR-linked loan mix.

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