The Reserve Bank of India delivered a widely expected 25 basis points rate hike to 5.50% on Wednesday, marking the first increase since February 2023. However, the RBI's hawkish tone has raised concerns about a deeper tightening cycle if inflation remains elevated, creating uncertainty in the banking sector. According to Moneycontrol, the rate hike was expected, but the hawkish stance has added to market concerns about future monetary policy direction. This development comes as the Nifty Bank index had already been trading under pressure, hitting an intraday low of 54,636.20 against its previous close of 55,128.40, translating into an intraday fall of around 0.89%. Among the index constituents, Union Bank of India witnessed the sharpest fall at 1.72%, AU Small Finance Bank fell 1.50%, while IndusInd Bank declined 1.47%. Other major banking stocks were also under pressure, with Canara Bank down 1.11%, Bank of Baroda 1.10%, Axis Bank 0.99%, Federal Bank 0.92%, State Bank of India 0.90% and HDFC Bank 0.87%. Yes Bank fell 0.72%, while ICICI Bank declined 0.54% and Kotak Mahindra Bank 0.35%.
Indian banks experienced a decline in market capitalisation during the July-September quarter, with investors potentially finding value in select lenders as the country's economic growth remains intact, according to S&P Global Market Intelligence data. HDFC Bank, India's largest lender by market capitalisation, saw its market value decline 11.1% sequentially to ₹10.92 trillion as of September 30. ICICI Bank's market capitalisation fell 3.9% to ₹9.48 trillion, while State Bank of India's declined 6.6% to ₹8.86 trillion. The three lenders retained their positions as India's largest banks by market value. Kotak Mahindra Bank was among the few large lenders to register a gain, with its market capitalisation rising 6.3% to ₹4.15 trillion, overtaking Axis Bank to become India's fourth-largest bank by market value. Axis Bank's market capitalisation fell 8.9% to ₹3.82 trillion. Among other lenders, Punjab National Bank's market value rose 6%, while RBL Bank registered a 9.3% increase. In contrast, Bank of Baroda saw its market capitalisation decline 15.4%, while Yes Bank and Bank of Maharashtra recorded drops of 13.4% and 13.2% respectively. The combined market capitalisation of the top 20 listed Indian banks stood at ₹50.11 trillion at the end of September.
While the expected 25 bps hike is largely factored into market expectations, investors are closely watching the RBI's monetary policy stance, inflation outlook and guidance on the future course of interest rates. According to V K Vijayakumar, Chief Investment Strategist, Geojit Investments Limited, the key focus for markets will be the monetary stance and the message from the RBI Governor. He said a 25 bps hike is inevitable and already discounted by the market, making the central bank's commentary on the emerging growth-inflation dynamics particularly important. Domestic inflation remains above the RBI's 4% target, while elevated crude oil prices pose an additional external risk. Higher crude prices could put further pressure on India's inflation trajectory and widen the current account deficit, keeping investors cautious toward rate-sensitive sectors including banking stocks ahead of the policy announcement.
Despite the expected rate hike, banking stocks displayed mixed performance with some gaining while others declined. As per latest market data, bank stocks were in the green zone after the repo rate hike, as higher interest rates can allow banks to charge more on loans, potentially supporting their interest income. If lending rates rise faster than the rates paid on deposits, banks can benefit from a wider net interest margin (NIM), which can improve profitability. Utkarsh Small Finance Bank (SFB) soared as much as 6.7% to hit the session's peak of ₹14.43 per equity share, as the company reported strong Q2 FY27 business updates with total disbursements surging 54.9% year-on-year to ₹3,525 crore and gross loan portfolio reaching ₹20,063 crore. Kalyan Jewellers India surged as much as 6.03% to hit an intraday high of ₹581.20 following robust Q2 FY27 performance with consolidated revenue growth of more than 26% and strong same-store sales growth across key markets. However, Titan Company shares fell up to 4.7% to ₹4,335.60 after Q2 FY27 business update showed domestic jewellery growth of around 21% YoY, below analyst expectations due to shift in festive calendar.
The banking sector rally comes as markets await the RBI's Monetary Policy Committee October meeting outcome on Wednesday, October 07, following the two-day meeting that began on Monday, October 05. According to The Economic Times, Sunny Agrawal, head-fundamental research, SBI Securities, noted that markets will look to the Reserve Bank of India's monetary policy announcement on Wednesday for further direction. Akshat Garg, Head- Research & Product, Choice Wealth, believes that a surprise 25 bps hike to 5.50% — the first since February 2023 — would trigger a sharply sector-specific reaction in equities, with clear winners emerging across private banks, insurance companies, tech exporters, and PSU undertakings. The festive season is approaching, with consumers expected to borrow via different instruments for purchase of autos and electronic gadgets, providing additional momentum for the banking sector. With the expected 25 bps rate hike already largely priced in, the immediate market reaction could depend more on the RBI's assessment of inflation, growth, crude oil prices, currency conditions and the future monetary policy path.
