Explained – Why Nifty Bank saw a sharp recovery after RBI policy rate raised on expected lines

The Nifty Bank index recovered more than 500 points from the day’s low on Wednesday, October 7, after the Reserve Bank of India (RBI) raised the repo rate by 25 basis points and shifted its policy stance to “Calibrated Tightening”. The central bank also raised its FY2027 GDP growth forecast.

For banks, the impact of the rate hike will depend on how quickly lending rates and deposit costs adjust, as well as the pace of credit growth.

An interest rate hike prompts banks to immediately raise External Benchmark Lending Rate (EBLR) rates.

Shares of rate-sensitive sectors, including automobiles and real estate, remained under pressure after the RBI’s Monetary Policy Committee (MPC) raised the policy repo rate to 5.5%.

The rate hike marks the first increase in policy rates in more than three-and-a-half years, with the RBI’s previous hike coming in February 2023.

The decision was unanimous, with all six MPC members voting in favour of the 25-basis-point increase. The committee also changed its stance from “Neutral” to “Calibrated Tightening”, with four members voting in favour and two against.

In his post-policy address, RBI Governor Sanjay Malhotra said rate cuts are “off the table in the near-term”, indicating that the next policy moves would either be a hike or a pause.

The RBI expects the Indian economy to remain resilient, although inflation risks have increased. Malhotra said high-frequency indicators point to continued momentum in economic activity during the second quarter, albeit at a slower pace than in the first quarter.

The central bank raised its FY2027 GDP growth forecast to 7.1% from 6.7% earlier. Its Q2 growth estimate was raised to 7.2% from 6.4%, while the Q3 projection was increased to 6.9% from 6.5%. The Q4 forecast was retained at 6.8%.

For Q1 FY2028, the RBI lowered its growth projection to 7.1% from 7.3% earlier, while saying the risks to its growth outlook are evenly balanced.

On inflation, the RBI flagged supply-side risks arising from a deficient monsoon, El Niño conditions and volatility in oil prices.

The central bank raised its FY2027 CPI inflation forecast to 5.2% from 5% earlier. The Q2, Q3 and Q4 projections were increased to 4.9%, 6% and 5.7%, respectively, from 4.7%, 5.9% and 5.5% earlier.

The CPI inflation forecast for Q1 FY2028 was also raised to 5.6% from 5.3% earlier.

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