At Record High! Nifty Financial Services Emerges as Best-Performing Sector in H1 2025, Rallies Nearly 16%

Nifty Financial Services Surges to All-Time High, Outpaces Broader Market in H1 2025

Mumbai, June 26, 2025 — The first half of calendar year 2025 has proven to be a golden phase for the Indian financial sector. Nifty Financial Services index emerged as the best-performing sectoral index, clocking an impressive 15.9% gain from January to June — significantly outperforming the Nifty 50, which returned just under 8% during the same period.

The index, which includes heavyweight constituents such as HDFC Bank, ICICI Bank, Bajaj Finance, SBI, and Kotak Mahindra Bank, surged to an all-time high of 22,340 points this week, driven by robust credit growth, improved asset quality, strong earnings, and renewed interest from foreign investors.

Strong Credit Growth and Economic Revival Fuel Rally

The rally in the Nifty Financial Services index reflects a broader resurgence in India’s economy. With credit offtake rising over 14% YoY, led by retail, MSME, and infrastructure-linked lending, banks and NBFCs have posted healthy net interest margins and loan book expansion.

“Credit momentum remains robust in both urban and rural markets,” said Siddharth Menon, head of research at BrokingVision. “The combination of RBI’s dovish stance, moderation in inflation, and higher capex spending has bolstered banking activity across all segments.”

Additionally, rising digital transactions, increased financial penetration through fintech platforms, and better risk provisioning frameworks have helped NBFCs regain investor confidence.

Q4FY25 Results Reinforce Sector's Strength

The earnings season for Q4FY25 cemented the sector’s bullish tone. Banks like ICICI Bank and Axis Bank reported record net profits with improved gross NPA ratios, while HDFC Bank and Kotak Mahindra Bank posted sequential improvements in cost-to-income ratios.

According to Edelweiss Securities, “Top private banks have successfully passed on the cost of funds hike to borrowers while maintaining asset quality, suggesting sustainable profitability for upcoming quarters.”

Meanwhile, Bajaj Finance, a key NBFC in the index, reported a 21% YoY growth in net profit, boosted by its personal loan and consumer durable loan segments.

Foreign Portfolio Investors Return with Conviction

After turning net sellers in late 2024, Foreign Portfolio Investors (FPIs) have returned aggressively to Indian financials in H1 2025, attracted by valuations and earnings momentum.

Data from NSDL shows that FPIs infused over ₹28,000 crore into financial services between January and June 2025 — the highest sectoral allocation among all segments.

“Financial services offer a direct play on India’s macro growth. With the rupee stabilizing and Fed rate cuts expected in Q3, capital is flowing back into quality Indian banks,” said Karishma Gandhi, fund manager at AlphaEdge Capital.

Digital Transformation and Regulatory Stability Add Tailwinds

Beyond traditional metrics, the structural transformation within India’s financial ecosystem continues to attract long-term investors.

The RBI’s push for Account Aggregators, UPI 3.0, and e-KYC systems have simplified lending and increased customer acquisition at scale. Fintech-banking partnerships are enabling wider outreach while maintaining compliance.

At the same time, regulatory clarity — including the inclusion of large NBFCs in the PCA framework and stricter guidelines on unsecured lending — has strengthened the sector’s systemic resilience.

What Lies Ahead: Can the Rally Sustain in H2 2025?

As H2 2025 unfolds, analysts remain optimistic, though selectively bullish.

“We believe that Tier-1 private banks and diversified NBFCs will continue to outperform,” said Sandeep Bhatia, sectoral strategist at Prithvi Investments. “But investors should remain cautious about microfinance lenders and unsecured-heavy portfolios, especially if interest rates don’t ease as expected.”

Challenges such as global macro uncertainty, geopolitical risks, and domestic inflationary pressures could pose intermittent hurdles. However, most experts agree that India’s financial services sector has entered a multi-year structural upcycle.

Investor Takeaway: Diversified Exposure Preferred

With the index at a record high, investors are advised to focus on diversified exposure rather than chasing individual high-flyers. Mutual funds focused on banking and financial services, or ETFs tracking the Nifty Financial Services Index, could offer a balanced route.

“The sector is well-poised, but valuations are rich,” said Rajat Arora, wealth manager at CapitalNest. “It’s best to take staggered entries and stick to fundamentally strong names with low NPAs and high CASA ratios.”

Nifty Financial Services' stellar performance in H1 2025 highlights the sector’s resilience, adaptability, and pivotal role in India’s growth journey. While risks persist, the broader narrative remains bullish — underscoring the financial sector’s centrality to equity portfolios in the evolving macro landscape.