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The change has raised Jefferies’ rate-hike expectation to 75-100 basis points from 50 basis points earlier. It said this could become a positive catalyst for earnings of large private banks, PSU banks and housing finance companies, while posing a mild risk to smaller private banks, NBFCs and life insurers. The report comes at a time when Indian equities have been under pressure from foreign selling, high crude prices, a weak rupee and elevated US bond yields. Banks have not escaped the broader market correction, but Jefferies believes rate hikes can change the earnings debate for lenders whose loan books reprice quickly. The key reason is the structure of bank lending. Large private banks have a higher share of external benchmark-linked loans, which usually reprice within one to three months when policy rates move. Banks with a higher share of such loans and manageable loan-deposit ratios could see earnings benefits over the next three to six months, Jefferies said. Who gains most Jefferies sees ICICI Bank and Kotak Mahindra Bank among the higher beneficiaries because of their higher share of external benchmark-linked loans and manageable loan-deposit ratios. PSU banks may also benefit, despite having a lower share of such loans, because they start from lower return-on-assets and could use higher margins to absorb wage negotiation costs and expected credit loss transition pressures. HDFC Bank and Axis Bank are seen as mid-range beneficiaries. Both have a higher share of external benchmark-linked loans, but the benefit may be moderated by higher loan-deposit ratios or a higher share of wholesale deposits. The sensitivity is meaningful for some lenders. Jefferies estimates that if 75 basis points of rate hikes flow through to yields and banks retain 15% of the benefit, it could lift FY28 earnings. Its analysis shows higher earnings sensitivity for PNB, SBI and Axis Bank, with PNB at 6%, SBI at 4% and Axis at 3%. Jefferies now expects the cycle to turn the other way, with banks potentially reporting margin expansion in FY28. NBFCs face a split outcome The rate-hike cycle may be less straightforward for NBFCs. Smaller private banks and NBFCs have more fixed-rate or internally benchmarked loans, which do not reprice as quickly. That makes them less direct beneficiaries of higher policy rates. Within NBFCs, Jefferies sees prime housing finance companies such as LIC Housing Finance and Bajaj Housing Finance, along with select diversified NBFCs such as Aditya Birla Capital, as possible beneficiaries because their floating-rate assets are higher than floating liabilities. But lenders such as Mahindra & Mahindra Financial Services and SBI Cards are more exposed to rate hikes. The report’s NBFC analysis shows a sharp difference in balance-sheet sensitivity. LIC Housing Finance, PNB Housing Finance, Can Fin Homes and Bajaj Housing Finance have high floating-rate loan books, while SBI Cards has almost no floating loans, making it more vulnerable in a rising-rate environment. Life insurers could also face some pressure if rate hikes flatten the yield curve. Jefferies said tighter liquidity can lift short-term rates and make the curve less steep, which may be mildly negative for life insurers. Banks may regain relative appeal Jefferies said earnings upgrades can help Indian banks perform better, especially against NBFCs. It also noted that Indian banks have underperformed global banks by 55 percentage points over the past two years, even as global banks benefited from better growth and margin trends. That relative performance gap may begin to narrow if earnings trends improve. Consensus estimates cited by Jefferies show Indian financials delivering stronger earnings growth than global financials in FY28/CY27, with Indian financials expected to grow 14% against 7% for global financials. Among its large bank picks, Jefferies has a Buy rating on ICICI Bank with a target price of Rs 1,750, implying 31% upside. It has a Buy on Axis Bank with a Rs 1,700 target, implying 39% upside, and a Buy on SBI with a Rs 1,320 target, implying 38% upside. The call is clear: in a rising-rate cycle, banks with faster loan repricing, controlled funding pressure and better earnings sensitivity may move back into favour. For Jefferies, that makes banks a better bet than NBFCs. Disclosure: This article has been written by Podishetti Akash, who is not a SEBI-registered Research Analyst or an Investment Adviser. Podishetti Akash and his ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclosures here. (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2025, Share Market on Budget 2025 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .) 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