Rate-sensitive stocks, such as banking, NFBC, and auto counters traded with sharp gains, as the Reserve Bank of India's Monetary Policy Committee slashed the key lending rate by 50 basis points on Friday, June 6, ahead of market expectations. The RBI also changed its stance to 'neutral', from 'accommodative' earlier.
Further, banking stocks got a fillip from the RBI trimming the CRR, also known as the cash reserve ratio, by 100 basis points. The CRR cut will happen in four tranches of 25 basis points each starting from September 6, October 4, November 1 and November 29 this year
At 10.50am, the Bank Nifty hit a fresh record high at 56,515.80, higher by 1.3 percent. The PSU Bank and Private Bank index also soared 0.9 percent and 1.6 percent respectively. The Nifty Realty index jumped nearly three percent in trade, and the Nifty Auto index was 1.2 percent higher. The Nifty Financial Services index also rallied around one percent.
The RBI Governnor Sanjay Malhotra said, "The stress witnessed earlier in retail segments like unsecured personal loans and credit card receivables portfolio has abated, while the stress in micro-finance segment is persisting. Banks and NBFCs active in these segments are already recalibrating their business models, strengthening their credit underwriting practices and stepping up their collection efforts to avoid any excessive build-up of risks on this front in future."
Sonam Srivastava, Founder and Fund Manager at Wright Research PMS said, "The RBI’s surprise 50 basis point rate cut underscores its strong pivot toward supporting growth, at a time when inflation is under control and global central banks are entering easing cycles."
She added that with real rates still elevated and domestic demand uneven, this move is aimed at unlocking credit growth, reviving private investment, and easing the burden on borrowers. "Sectors like housing, autos, banking, and infrastructure are likely to see improved momentum as transmission picks up."
Investors bet on easing borrowing costs, which would boost demand for housing and auto products, in turn improving profitability for lenders, either banks or non-banking financial companies.
During the April meeting, the RBI MPC cut the lending rate by 25 basis points to the 6 percent mark, down from 6.25 percent earlier, marking the second consecutive rate cut. With the 50 basis points cut, the repo rate stands at 5.5 percent.
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Ahead of the announcement, experts had said a 25 basis points cut is unlikely to move equity markets much as no major surprises are expected in the repo rate or policy stance. Instead, stocks are likely to be driven by earnings and global cues.
Vikas Gupta, Founder and CEO of Omniscience Capital, had said a rate cut of more than 25 bps or a strong dovish stance could trigger a stronger market reaction. He also flagged infrastructure as a potential gainer: “For industrial/corporate capex and infrastructure, lower interest rates make more projects viable, boosting loan demand,” he said.
The repo rate affects borrowing costs. A reduction encourages loans and spending, spurring growth and typically supporting market sentiment.
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VR Krishnan, Head of Quantitative Research at Marcellus Investment Managers, said that most auto purchases in India are financed, so lower rates help automakers. "With household debt rising, lower rates reduce interest costs and boost disposable income, benefiting consumer discretionary stocks.”
On the banking side, he added, “Many mortgages are repo-linked, so the benefit reaches borrowers quickly. But banks may struggle to lower deposit rates due to strong retail and CASA competition, potentially squeezing net interest margins.”
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