Nifty Bank surges to record high led by ICICI Bank, Bank of Baroda

Sub index of banking shares on the National Stock Exchange - Nifty Bank index - surged as much as 0.68 per cent or 361 points to hit fresh record high of 53,398.85 on Friday paced by gains in ICICI Bank , Bank of Baroda, Punjab National Bank, Kotak Mahindra Bank, HDFC Bank and IDFC First bank.

Banking shares have been on a buying interest since the start of this week as the measure of 12 banking shares has surged a whopping 1,460 points or 2.81 per cent since last Friday, data from the National Stock Exchange showed.

Hopes of interest rate cut by the Reserve Bank of India ( RBI ) after the US Federal Reserve surprised with a first rate cut in four years, which was bigger than expected, led to buying interest in banking shares, analysts said.

The US central bank on Wednesday kicked off an anticipated series of interest rate cuts with a larger-than-usual half-percentage-point reduction that Federal Reserve Chair Jerome Powell said was meant to show policymakers' commitment to sustaining a low unemployment rate now that inflation has eased.

The Federal Open Market Committee (FOMC) reduced the federal funds rate target range to 4.75-5 per cent from 5.25-5.50 per cent, a cut larger than anticipated. This move follows a prolonged period of holding rates at a high level for over two years.

“Overall, the contradiction between starting the easing cycle with an outsized cut while maintaining that the economy is in good shape was a difficult one for Powell to justify. While we were never in the recession camp, a significant slowdown is already underway (as evident through recent labor data), and the pace of this slowdown will dictate the pace of rate cuts going ahead,” brokerage firm Emkay said in a note.

“Markets are pricing in 60 basis points (bps) of easing for 2024 and 150 bps for 2025, significantly more than the Fed’s projections. While the initial reaction was positive, most asset classes gave up their gains by the end of the press conference as Powell cautioned against expecting larger cuts going ahead,” Emkay said.

Emkay added that RBI still has room to prioritise domestic dynamics and its first cut is likely to come by December.

“This outsized cut has given EM Asia room to proceed with their own easing cycles, with the Bank of Indonesia delivering a 25 bps cut. With the global market reaction having been muted thus far, the RBI still has flexibility to remain focused on domestic inflation and risk management, albeit there are over 20 days before its next MPC meeting. The RBI is likely to maintain its wait-and-watch stance and focus on being actively disinflationary, with a first rate cut likely by December. A case for an early cut is still less likely, and we continue to see shallow cuts by both Fed and the RBI in this cycle,” Emmkay added.