The investment bank, in a report dated March 10, says it expects a re-rating across the sector as the bad-loan cycle could be "close to the end" if the economy remains stable.
Morgan Stanley forecasts an improving economy, as indicated by a narrowing current account deficit and a stable currency, while also noting that liquidity has improved and real deposit rates have turned positive.
Private sector lenders extend gains: Bank Nifty is up 1.02 per cent at 11:39 a.m., helping the broader Nifty briefly hit a record high earlier in the session.
Expectations for an improving economy and a pause in the RBI's rate-hiking campaign have sparked a rally in the sector. After falling 10 per cent in January, the NSE bank sub-index has surged 5.2 per cent in February and 11.7 per cent so far in March.
The Sensex briefly hits a record high on the back of continued strong foreign buying in blue chips such as HDFC Bank, but edges lower soon afterwards on profit-taking and because of falls in regional shares.