Nifty Bank hits record high after RBI rate cuts; Banking & financial stocks rally

The Nifty Bank index was seen hitting a new record high during the trading session on Friday, after the Reserve Bank of India (RBI) announced its monetary policy, cutting the interest rates by 50 basis points (bps), beating the major consensus of 25 basis points rate cut. This led to a sharp rally in the rate sensitive financial stocks including banks and shadow lenders.

The Nifty Bank index soared 1.39 per cent to hit 56,535.85 during the session. Among the index constituents, IDFC First Bank led the gainers, rising 5 per cent to Rs 70.10. It was followed by Axis Bank and Punjab National Bank, which rose 3 per cent each to Rs 1,193.70 and Rs 111.80, respectively. Canara Bank was the sole loser in the Nifty Bank index.

The higher-than-expected 50 bps rate cut decision by the MPC, though positive for growth, is slightly negative from the market perspective for the near-term, said Dr VK Vijayakumar, Chief Investment Strategist at Geojit Investments.

This big rate cut will impact the margins of the banks and, therefore, bank stocks will be under pressure in the near-term. However, the credit growth that this rate cut will hopefully stimulate will compensate for the dip in margins," he said.

The Nifty Private Bank index outperformed the Nifty PSU bank index. The former one increased 1.35 per cent, while the latter one was up 0.75 per cent after the policy. Nifty Financial Services index was up 1.35 per cent. However, state-run lenders were trading mixed. Bank of Baroda was up 2 per cent and SBI rose a per cent. Indian Overseas Bank was down 3 per cent, while UCO Bank and Central Bank were down 2 per cent each.

A 25 bps rate cut was already priced in by the markets, a 50 bps cut comes as a surprise. The unanimous decision is along expected lines, but the magnitude of the cut is significant, said Divam Sharma, Founder & Fund Manager at Green Portfolio PMS. "We like niche domestic manufacturing companies that are building in India and gearing up to compete on a global scale."

All the private bank indices were trading in green. Bandhan Bank rose 2 per cent, following Axis Bank and IDFC First Bank. RBL Bank, Federal Bank, Kotak Mahindra Bank, IndusInd Bank and HDFC Bank gained one per cent each. YES Bank and ICICI Bank were also up one-third per cent higher.

In the financial services index, HDFC AMC gained nearly 5 per cent, while Bajaj Finance rose 4 per cent. Shriram Finance and SBI Cards were up 3 per cent each. Chola Finance, ICICI Lombard GIC and REC gained up to 2 per cent each. However, HDFC Life Insurance Company was the sole stock trading in red in the index.

The cumulative 100 basis point rate cut since February underscores the RBI’s urgency to support demand, while the shift to a neutral stance signals a more cautious, data-driven approach to balancing growth and inflation risks going forward, said Anil Rego Founder & Fund Manager at Right Horizons PMS.