Private sector bank shares rallied up to 4 per cent in Tuesday’s intraday trade a day before the Reserve Bank of India (RBI) announces its monetary policy decision. The central bank’s Monetary Policy Committee (MPC) will release its outcome on Wednesday, October 7, following a two-day meeting that began on Monday. Market participants are anticipating a hike in interest rates, a move widely supported by analysts and bond market signals.
Market performance and stock gains
The Nifty Private Bank index surged over 1 per cent to reach 27,000 levels on the bourses. The broader Bank Nifty and Nifty PSU Bank indices also posted gains, climbing 0.6 per cent and 0.3 per cent, respectively. The BSE Sensex and NSE Nifty both advanced by 0.4 per cent. Leading the rally was Kotak Bank, which gained 4 per cent. Axis Bank, IndusInd Bank, and Bandhan Bank each rose more than 1 per cent, while HDFC Bank traded with a 0.5 per cent increase.
Market participants are closely watching the upcoming policy announcement. The RBI is widely expected to increase interest rates, a decision influenced by rising bond yields and inflationary risks tied to geopolitical tensions in the region. V K Vijayakumar, Chief Investment Strategist at Geojit Investments, notes that a 25 basis points hike appears inevitable given rising inflationary expectations and the debt market environment.
Analysts expect 25 bps rate hike
Analysts believe the RBI will likely hike interest rates by 25 basis points during the October meeting. Murthy Nagarajan, Head-Fixed Income at Tata Asset Management, stated that the Indian bond market is currently pricing in a repo rate hike of 25 basis points and a temporary cash reserve ratio (CRR) hike of 50 basis points. He added that the bond market has already factored in a 100 basis points of rate hikes in the current cycle.
Nagarajan suggests that if the RBI Governor is not hawkish in his comments, the debt market may stabilise and trade within a band of 7.15 per cent to 7.25 per cent. The analyst points to the US ten-year bond yields, which have touched a historical high of 5.34 per cent, a level last seen in 2002. This surge is attributed to high CPI inflation and large borrowings by quality companies in the bond markets for longer tenures. The US Federal Reserve recently hiked rates by 25 basis points, and its hawkish stance continues to put pressure on the Indian currency.
From the banking sector perspective, Vijayakumar believes a rate hike would benefit banks whose margins will improve from rising floating rates. He added that strong deposit and credit growth in the economy indicate good prospects for the financial sector. Investors are focused on the policy stance and the RBI’s estimates regarding growth and inflation, as the rate hike is already discounted by the market.
