Will Bank Nifty continue its bullish trend after RBI's bold move?

Mumbai: The Bank Nifty index, comprising 12 of India's top lenders, extended its record-breaking run to the second straight day on Monday, riding on a bullish momentum fuelled by the Reserve Bank of India's bigger-than-expected interest cut and a surprise liquidity easing move last week.

The measure rose 0.5% to a closing high of 56,839, off the all-time high of 57,049.

The rally in bank shares also drove the benchmark Nifty higher for four sessions in a row. The index gained 0.4%, or 100.1 points, to close at 25,103 on Monday-the highest closing in 2025.

"The interest rate cut was expected to hurt bank margins, but the CRR (Cash Reserve Ratio) cut has helped cushion the impact. This has boosted banking and NBFC stocks," said Pankaj Pandey, head of retail research at ICICI Direct.

Out of the 12 stocks in the Bank Nifty Index, 11 advanced and 1 declined. The Nifty PSU Bank Index climbed 1.5% while the Nifty Private Bank and Nifty Financial Services Indices advanced 1% and 0.5%, respectively.

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Jio Financial Services and Kotak Bank gained 3.9% and 3.3%, respectively, while Bajaj Finance and Axis Bank moved around 2.5% higher.

Brokerage UBS said the key beneficiaries of RBI's CRR cut of 100 basis points are banks with high loan-to-deposit ratios (LDR) and tight liquidity coverage ratios (LCR).

"This is especially positive for mid-cap banks (like AU Bank) and large banks, which had greater liquidity requirements (HDFC Bank and Axis)," said the firm. "As of Q4FY25, HDFC and Axis had the highest LDR and among the lowest LCR among covered banks."

RBI's CRR cut frees up significant capital, directly relieving liquidity stress and enhancing their ability to fund loans and grow deposits. In the last month, Bank Nifty gained 6% while the benchmark Nifty index rose 4.6% in the same period.

"The momentum in Bank Nifty is expected to continue for a few weeks and drive the markets to fresh new highs as the 50-basis point interest cut was not anticipated by investors," said Dharmesh Kant, head of research, Cholamandalam Securities. "This has acted as a sentiment booster due to lower cost of funds and anticipation of increased consumption."

Kant said a pickup in consumption remains key, and typically, there is an uptick in consumption when the sentiment is optimistic, as it is likely to be post the liquidity boost.

“Despite the pressure on net interest margin (NIM), the capital gains in the fixed book and treasury are likely to offset the NIM contraction,” said Kant.

Analysts said non-banking financial companies (NBFCs) are poised to outperform within the BFSI space as a major beneficiary of the interest rate cut.

“Since most NBFCs in the housing and vehicle finance segment lend based on fixed interest rates, the rate cut implies reduced cost of borrowing and improved NIMs,” said Pandey.

“Gold financing NBFCs are also likely to benefit from the relaxed regulatory norms.” While NBFC stocks are better placed to benefit from the interest rate cut, the stocks are trading at expensive valuations, said Kant. “Barring the largecap names like SBI, PSU Banks can see 15-20% upside potential from current levels in the near term,” he said.