Domestic mutual funds unleashed a Rs 38,000 crore buying spree across five banking giants in March, mounting an aggressive counter-offensive as foreign institutional investors dumped a staggering Rs 60,655 crore worth of financial stocks during the worst of the Iran war selloff.
The multi-billion dollar battle saw mutual funds pile into HDFC Bank (Rs 17,250 crore), ICICI Bank (Rs 7,320 crore), State Bank of India (Rs 5,450 crore), Kotak Mahindra Bank (Rs 4,089 crore), and Axis Bank (Rs 3,892 crore), according to Prime Database estimates for March 2026. HDFC Bank emerged as the top addition across major fund houses, including SBI MF, Nippon India MF, Quant MF, ICICI Prudential MF, Axis, Aditya Birla, and DSP.
The FII exodus from banks was brutal, as every second dollar pulled out from Dalal Street in March came from the financial sector. The Rs 60,655 crore outflow represented more than half of the total Rs 1.18 lakh crore that FIIs withdrew from Indian equities last month, according to NSDL data, making banks and financials the hardest-hit segment.
The carnage sent Nifty Bank plunging 17% in March, with Nifty PSU Bank tumbling nearly 20% as the worst performer. Nifty Financial Services fell 15.6% as the broader Nifty crashed over 11%.
Yet, the severity of the selloff has created opportunities, according to brokerages, which argue that the correction has already priced in 2-3 quarters of slower growth.
“After the start of the conflict, stocks have corrected by about 10-15% in the case of most largecap banks and NBFCs,” BNP Paribas noted. “It is hard to argue that the starting valuations were rich for our preferred large private banks. We like the risk-reward at current prices and only meaningful economic injury through a prolonged disruption could materially change the prognosis.”
Prabhudas Lilladher turned more bullish, upgrading its overweight stance on banks and increasing allocation to Kotak Mahindra Bank and HDFC Bank by 40 basis points each.
“Credit growth remains strong at 13-14%; however, the Gulf War and a change in the interest rate cycle have led to stocks being hammered. We believe that frontline banks would have an advantage in this scenario,” the brokerage said, though it cautioned that medium-term credit growth trends will depend on sustained consumer demand and resolution of the war.
Emkay’s Anand Dama expects profitability in the banking sector coverage universe to improve roughly 10% YoY and 5% QoQ, “mainly led by private banks, up 14% YoY/8% QoQ due to lower credit costs.”
However, he expects profit growth momentum for public sector banks to moderate slightly, declining 10% YoY and 2% QoQ, due to weaker treasury performance.
Ambit Capital acknowledged that the sector faces a “valuation discount” as macroeconomic uncertainty forces a recalibration of risk premiums. “Heightened geopolitical volatility and a tightening liquidity environment have introduced significant ‘earnings visibility’ risks,” the brokerage said, warning that P/BV multiples will remain range-bound until global supply chain disruptions and domestic liquidity constraints stabilise.
Still, Ambit struck an optimistic long-term note: “From a longer-term perspective, banks at currently lower valuations offer a good opportunity to buy, as balance sheet strength and the long-term fundamentals of banks are healthy.”
The mutual fund buying binge suggests domestic institutional investors are betting the war-driven correction has created a rare entry point in India's banking heavyweights in a wager that will be tested as geopolitical tensions and liquidity pressures continue to weigh on the sector.
