India’s banking sector could be on the brink of a revival, with Goldman Sachs forecasting that a series of policy rate cuts and regulatory relaxations by the Reserve Bank of India (RBI) will ease capital constraints and boost lending.

According to the report ‘India: Deregulation dividend for the banking system’ released on October 15, 2025, the RBI’s rapid 100 basis point policy rate cuts this year, combined with improved liquidity and relaxed norms, could reduce banks’ capital requirements by about 2 percentage points of total credit. The report says these measures “should progressively lower banks’ capital constraints and funding costs,” paving the way for stronger credit expansion and better earnings growth in the years ahead.

The report said, "We expect credit growth to recover from 2H FY26. With several capital‑easing measures taking effect in 2027, and the proposed materially easier offshore borrowing norms can further support total private sector credit growth over the next two years."

The report explains that India went through a phase of tight financial conditions during 2024, when liquidity pressures and regulatory curbs slowed credit expansion. “Banking system liquidity remained tight through 2024, driving overnight rates consistently above the policy repo rate and slowing deposit growth,” Goldman Sachs notes.

As a result, companies increasingly turned to offshore borrowing, with external commercial borrowings growing at the fastest pace in nine years. This slowdown in bank lending weighed on economic growth and corporate investment sentiment, but conditions began to turn around in 2025 as the RBI began its most aggressive easing cycle since the Global Financial Crisis.

Goldman Sachs highlights that the RBI’s multiple steps — including the one-percentage-point cut in the Cash Reserve Ratio (CRR) and relaxed capital norms for sectors such as housing and MSMEs — will create greater flexibility to optimise lending-deposit spreads via reduced cost of capital.

These reforms, it says, could allow banks to redeploy capital into interest-earning assets, thus stimulating credit demand once growth conditions improve. The report also points out that many of these measures will become effective in 2027, meaning the impact on growth will likely be felt over the next two years, with credit recovery expected from the second half of FY26.

Earnings are expected to follow this recovery path. Goldman Sachs notes that earnings sentiment for banks is at a one-year high, with profit growth for financials likely to rise to 15% in 2026 from 8% this year. It concludes that financials remain attractively valued, trading at “1.1 times PEG ratio versus MSCI India at 1.5 times,” suggesting room for re-rating. The report adds, “We expect NIFTY Banks to outperform the broader market,” reinforcing optimism that India’s banking system is poised to benefit from this deregulation-driven turnaround. "We remain OW banks and NBFCs and think NSEBANK Index could outperform NIFTY near-term," adds the report.