Sensex up 1,600 pts, Nifty near 23,300: Why markets surged after RBI policy

Stock market updates, June 7: The stock market rally was fuelled by gains in bank stocks which were, otherwise, nursing losses ahead of the RBI policy outcome today

Stock markets after the RBI June policy meeting: Stock markets shot up in trade on Friday, aided by bank stocks, after the Reserve Bank of India (RBI) left interest rates unchanged during their June monetary policy.

That apart, the anticipation of stability within the coalition government at the Centre boosted sentiment.

On the bourses, the benchmark BSE Sensex soared 1,719.5 points intraday to hit a high of 76,795. The Nifty50, too, surpassed the 23,300 level to hit an intraday high of 23,320.

At close, the BSE benchmark stood at 76,693, up 1,619 points or 2.16 per cent. The NSE Nifty50, on the other hand, ended at 23,290, up 469 points or 2 per cent. 

 

In the broader markets, the BSE MidCap, and SmallCap indices advanced up to 2 per cent.

The rally was fuelled by gains in bank stocks which were, otherwise, nursing losses ahead of the policy.

What was announced in RBI Policy today?

The RBI's Monetary Policy Committee (MPC) kept the key repo rate unchanged at 6.5 per cent for the eighth consecutive time on June 7. The decision was taken with a 4:2 majority.

The MPC, headed by RBI governor Shaktikanta Das, also decided to continue its stance of 'withdrawal of accommodation'.

What happened to Nifty Bank after the RBI Policy?

From a low of 49,080.45, the Nifty Bank index surged nearly 2 per cent to hit a high of 49,932 levels.

All the 12 constituents of the index were swimming in the sea of green led by Bandhan Bank (up 3 per cent), Axis Bank (1.8 per cent), ICICI Bank (1.5 per cent), HDFC Bank (1.26 per cent), and Federal Bank (1.17 per cent) as of 12:00 noon.

On the Nifty Financial Services index, Bajaj Finance rallied 3.8 per cent, Bajaj Finserv 2.8 per cent, IDFC 1.28 per cent, and Muthoot Finance 1 per cent.

By comparison, the Nifty Bank, and Financial Services indices were up 1.2 per cent each vs 1.6 per cent rise in the frontline Nifty50.

"The central bank has decided to maintain interest rates, which signals economic stability and boosts investor confidence. Additionally, the RBI introduced measures to enhance liquidity in the banking system, improving banks' ability to lend, and increase profitability. The positive economic growth projections and the RBIs commitment to managing inflation without hindering growth further bolstered market sentiment. These factors collectively created a favorable environment for banks," said Pravesh Gour, Senior Technical Analyst, Swastika Investmart.

Why did markets, bank stocks rise after the RBI MPC policy decision?

Upward FY25 GDP forecast revision

According to analysts, the RBI's upward revision in India's gross domestic product (GDP) growth forecast for fiscal year 2024-25 (FY25) gave market bulls a shot in the arm.

On June 7,  the RBI raised its GDP growth forecast for FY25 to 7.2 per cent from 7 per cent earlier, while the inflation forecast was retained at 4.5 per cent.

According to analysts, this upward revision has calmed market nerves, especially in the backdrop of a newly elected government and global uncertainty.

"The RBI is in a wait and watch mode as they await the newly elected government's fiscal glidepath and track their 'populist' measures, if any. Despite a sticky inflation, the upward revision in GDP forecasts bodes well for the upcoming fiscal year," said Kranthi Bathini, director-equities, WealthMill Securities.

Rajani Sinha, chief economist at CareEdge added that while overall growth remains strong, pain points exist in the private consumption demand.

"Even though recent high-frequency data like FMCG sales, auto sales, and unemployment rate point towards some recovery in consumption demand, it has yet to be reflected in final GDP numbers," he said.

More MPC members seek rate cut

During the June MPC policy, two of the six committee members sought repo rate cut as against the previous divide of 5:1. This, analysts said, reflected a potential shift in balance.

"More MPC split appears with a 4:2 vote, indicating the committee is moving closer to a rate cut," said  Vikas Garg, head of fixed income, Invesco Mutual Fund.

Distancing from the US Federal Reserve

Analysts said the governor's emphasis that their decision would be influenced by domestic factors, even though they will be watchful of the external environment, and not follow the US Federal Reserve (US Fed) blindly, reinforced that RBI could cut policy interest rate by the end of the calendar year, provided domestic inflation moderates.

Comfortable external position in the form of high forex reserves, and expectations of increased FII inflows with India's bond inclusion may provide room to the central bank for a rate cut, irrespective of the US Fed's decision, they added.

FY25 inflation outlook maintained

The RBI, on June 7, maintained the CPI inflation outlook at 4.5 per cent for FY25.

The transition from El Nino to La Nina after June, according to analysts, should bode well for food price inflation. With lower wage growth and inflation expectations in check, they expect headline inflation to converge with core inflation in FY25.

"With growth still strong and uncertainties high, both on the global and local front, there is no immediate need for policy easing. However, as inflation settles closer to the target and real rates rise further, we expect some room for easing to open up. We expect the first rate cut in October, with 75bp in cumulative easing in FY25," said Sonal Varma, managing director and chief economist (India and Asia ex-Japan), Nomura.

Banks in pink of health

RBI Governor, Shaktikanta Das, emphasised on several positive aspects of the banking and financial sector.

Bank balance sheets remain healthy, liquidity has shifted from a deficit to a surplus in recent months, and the banking system remains robust. Notably, gross non-performing assets (GNPAs) for scheduled commercial banks (SCBs) and non-banking financial companies (NBFCs) are below 3 per cent of total advances as of March 2024, with NNPA at a record low of 0.6 per cent.

"The Reserve Bank of India also highlighted moderation in unsecured retail loans and over-reliance of NBFCs on bank funding. All of this bodes well for the banking sector, in general," said Anwin Aby George, research analyst, Geojit Financial Services.