Bank Stocks Rise After RBI Rate Hike; Kotak Mahindra Bank, PNB, Union Bank Gain Up To 2%

Bank stocks reversed early losses on Wednesday, October 7, after the Reserve Bank of India (RBI) raised the repo rate by 25 basis points to 5.50% but refrained from announcing fresh measures to drain surplus liquidity from the banking system.

The Nifty Bank, which had fallen as much as 0.7% before the policy outcome, turned positive after the announcement. The index gained more than 147 points to 55,276 in morning trade even as the Nifty 50 remained in the red.

Kotak Mahindra Bank shares rose around 2%, while Punjab National Bank (PNB), Union Bank of India, Canara Bank, Axis Bank and State Bank of India gained around 1% each. Other banking and financial stocks also recovered from their earlier losses.

The RBI's 25-bps hike was its first rate increase since February 2023. While the central bank shifted its stance from neutral to calibrated tightening, it stopped short of announcing additional liquidity-tightening measures, offering some relief to banking stocks.

Why Are Bank Stocks Rising Today?

The turnaround in bank shares came after the RBI policy removed some of the uncertainty around liquidity.

Surplus liquidity in the banking system had raised expectations that the central bank could announce additional steps to absorb funds. The RBI, however, did not announce measures such as an increase in the cash reserve ratio.

“The Reserve Bank will use an appropriate mix of liquidity management tools,” RBI Governor Sanjay Malhotra said.

The RBI has so far used bond sales and longer-term foreign exchange swaps to drain liquidity from the banking system.

The rate decision itself was broadly in line with market expectations. The six-member Monetary Policy Committee unanimously voted to increase the repo rate from 5.25% to 5.50%.

The central bank also changed its policy stance to calibrated tightening as inflation risks increased, with four of the six MPC members voting for the change in stance.

Higher policy rates can have a mixed impact on lenders. Loan yields can move higher as lending rates are reset, while the eventual impact on margins also depends on deposit costs and how quickly they rise.

Bank credit growth, meanwhile, has remained strong. Credit grew 18.8% in October, reflecting firm demand for loans.

Kotak Mahindra Bank, PNB Lead Gains

Kotak Mahindra Bank was among the stronger banking counters after the policy announcement, rising around 2%. PNB, Union Bank of India, Canara Bank, Axis Bank and SBI gained around 1% each as the sector recovered from its morning decline.

The reversal was notable given the weakness before the RBI announcement. Nifty Bank had touched an intraday low of 54,693 ahead of the policy outcome, against its previous close of 55,128.40.

Union Bank had fallen as much as 1.72% in early trade, while PNB was down 1.22%, Canara Bank 1.11% and SBI 0.90%. Kotak Mahindra Bank had also traded lower before the policy announcement.

The direction changed after the RBI decision, with Nifty Bank moving back into positive territory even as the broader Nifty remained lower.

The reaction was also different from other rate-sensitive sectors. Auto stocks remained under pressure as investors weighed the prospect of higher vehicle financing costs following the repo rate increase.

For banks, attention will now turn to how the 25-bps hike is transmitted to lending and deposit rates and how the RBI manages the large liquidity surplus in the system.

The central bank has also raised its FY27 inflation forecast to 5.2% from 5% and shifted to calibrated tightening, keeping the possibility of further rate action in focus.

Also Read - Sensex, Nifty Recover From Day's Lows After RBI Rate Hike; Malhotra Says Rate Cuts 'Off The Table'