The October to December quarter proved to be a golden period for Indian banking stocks, which significantly outpaced the broader market. A festive season uplift, supported by government measures, fueled consumption and brightened the outlook for credit growth, leading to a sharp re-rating of the sector.
Valuation Surge Outpaces Broader Market
Data from S&P Global Market Intelligence reveals a robust increase in the combined market valuation of the country's top 20 listed banks. Their total market capitalisation climbed to approximately Rs 55.7 lakh crore by the end of December, up from an estimated Rs 51.5 lakh crore at the close of September. This translates to a substantial quarter-on-quarter growth of around 8.2%.
This impressive gain far exceeded the roughly 4% rise recorded by the benchmark Sensex during the same three-month window. The outperformance underscores a strong investor shift towards banking stocks, driven by improving demand for loans and a more favourable lending environment.
Smaller Private Banks and PSU Lenders Shine
The rally was broad-based, with seventeen of the top 20 banks posting an increase in their market value. The median gain for these institutions stood at about 11.8%. Notably, smaller private-sector banks emerged as the standout winners.
IDFC First Bank recorded the most dramatic ascent, with its market capitalisation skyrocketing by 43.8%. This leap propelled it to the 13th position from 17th in the previous quarter. Bank of India followed with a stellar 38.6% increase, while AU Small Finance Bank, which secured the Reserve Bank of India's approval to transition into a universal bank, saw a 36.1% gain.
Among larger lenders, Canara Bank distinguished itself with a 25.2% rise, comfortably above the sector's average. Public-sector banks collectively delivered strong double-digit performances. Bank of Baroda led this pack with a 14.5% gain, followed by Union Bank of India (11%) and Indian Bank (11.5%).
Steady Gains from Banking Giants
The country's largest banks also contributed to the overall valuation increase with steady growth. HDFC Bank, India's most valuable lender, saw its market cap expand by 4.4% to about Rs 15.2 lakh crore. The State Bank of India added 12.6%, broadly aligning with the sector median. Axis Bank and Kotak Mahindra Bank rose by 12.1% and 10.4%, respectively.
However, ICICI Bank was an exception among the top five, experiencing a slight decline of 0.3% in the quarter, though it retained its position as the second most valuable bank. The group performance was not uniform, with Indian Overseas Bank and UCO Bank being the weakest outliers, registering declines of 8.6% and 3.4% in market capitalisation.
Supportive Macroeconomic Backdrop
The valuation upswing was bolstered by a conducive macroeconomic and policy environment. In December 2025, the Reserve Bank of India reduced the policy repo rate by 25 basis points to 6.25%. This was part of a cumulative 125-basis-point reduction since February 2025, aimed at encouraging lending in a period of low inflation.
The sector's strength was mirrored in the Nifty Bank index, which advanced about 7.6% during the quarter, again beating the broader market. Analysts have noted the positive shift. Emkay Global, in a note dated January 3, observed that "Overall systemic credit growth is showing signs of improvement," validating the market's optimistic reassessment of banking stocks.
