PL Capital said the Reserve Bank of India (RBI) could raise the repo rate in October 2026 as consumer price inflation, may firm up to about 6 per cent in Q3FY27. It said tight liquidity between December 2025 and May 2026 has already pushed up bulk term deposit rates by 60-144 basis points, and system loan growth may slow to 12-13 per cent year-on-year (YoY) by March 2027 from 15-16 per cent in March 2026. 

According to PL Capital, a tighter credit cycle could leave public sector banks and Midcaps more exposed to growth and asset quality shocks because of their higher corporate and MSME mix, while private sector banks are better placed because of their higher retail share of 47 per cent.

The report said PVBs could outperform PSBs and midcaps because of their higher EBLR and unsecured share, as well as a better ability to garner deposits. Over FY24 to end-FY26, PSBs and midcaps under its coverage re-rated by 10-15 per cent and 35-50 per cent, while private banks de-rated by 8-30 midcaps. Among private Bank, it prefers ICICI Bank and Kotak Mahindra Bank, and among PSBs, it has picked SBI.

PL Capital said system liquidity has remained volatile since September 2025. Open market operations of Rs 11.5 lakh crore carried out from October 2024 to March 2026 were used by the RBI towards dollar sales of Rs 8.3 lakh crore to arrest the rupee's fall amid FII outflows, the report said. 

It added that the ongoing Middle East conflict has led to a global oil crunch, weakening the rupee against the US dollar and draining liquidity, which fell from Rs 5.5 lakh crore in mid-April 2026 to Rs 1.5 lakh crore by mid-June 2026. The report also said the system G-Sec to NDTL ratio fell to 27 per cent in March 2026 from 30 per cent in H2 2025 and 31 per cent in September 2023, leaving limited headroom to shore up liquidity.

On inflation, the report said CPI, after falling between October 2024 and October 2025, has started inching up again, rising from 0.3 per cent in October 2025 to 3.9 per cent in May 2026. It cited the RBI's June 2026 policy meeting, which projected CPI at the upper tolerance level of 6 per cent in Q3FY27.

PL Capital said this forecast remains subject to upside risks from global supply chain disruptions, commodity price shocks, and uncertainty around the monsoon and El Niño conditions. It said the likely inflation path could prompt a repo rate hike in October 2026, while lower system liquidity and the prospect of higher rates have already led PVBs to raise bulk deposit rates.

PL Capital said corporate and MSME loan growth was more volatile between March 2014 and March 2026, pointing to greater vulnerability to system shocks. By contrast, retail and agri loans were more resilient and did not see negative growth, supported by housing and agri-gold respectively. 

In the coming rising rate cycle, the report said MSME and agri segments could face higher asset quality risk. Micaps carry the highest asset quality risk because of their MSME and agri share of 30 per cent and 17 per cent, while PSBs face greater growth risk as corporate and MSME account for 58 per cent of their mix.

PVBs, with retail exposure of 47 per cent and agri share of 5.9 per cent, are seen as the least exposed, noted PL Capital. Overall, the report said tighter liquidity, firmer inflation and a possible repo hike could slow credit growth in FY27.

PL Capital has a 'buy' rating on Axis Bank (Target Price: Rs 1,600), City Union Bank (Target Price: Rs 310), DCB Bank (Target Price: Rs 155), HDFC Bank (Target Price: Rs 1,100), ICICI Bank (Target Price: Rs 1,825), Karur Vysya Bank (Target Price: Rs 345), Kotak Mahinda Bank (Target Price: Rs 480) and State Bank of India (Target Price: Rs 1,200).

The brokerage has an 'accumulate' on Bank of Baroda (Target Price: Rs 290), Canara Bank (Target Price: Rs 150), Federal Bank (Target Price: Rs 300), IndusInd Bank (Target Price: Rs 960) and Union Bank of India (Target Price: Rs 200).