Up 76% since first RBI rate cut; analysts divided on further rally in banks

Data shows that bank stocks such as RBL Bank, AU Small Finance Bank, Canara Bank, The South Indian Bank and City Union Bank surged over 55 per cent since the RBI first cut repo rate in February 2025.

The Reserve Bank of India (RBI) appointed Monetary Policy Committee (MPC) on Friday lowered the repo rate cut by 25 basis points (bps) to 5.25 per cent, while maintaining the 'Neutral' stance.  "Despite an unfavourable and challenging external environment, the Indian economy has shown remarkable resilience. It is poised to register high growth," said RBI Governor Sanjay Malhotra.  This was the fourth repo rate cut in the calendar year 2025. The RBI-MPC first cut rates by 25 bps on February 7, 2025, followed by another 25 bps in April and a bigger 50 bps cut in the June policy. Thus, RBI has lowered interest rates by 125 bps or 1.25 per cent when compared to 6.5 per cent at the start of 2025.   

RBI Rate cut vs. Bank share prices in 2025

  On the bourses, bank stocks have zoomed up to 76 per cent since the first rate cut this calendar year. An analysis of data from ACE Equity shows that 5 bank stocks namely - RBL Bank, AU Small Finance Bank, Canara Bank, The South Indian Bank and City Union Bank have rallied over 55 per cent each. 

 

  Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services highlights that apart from the Monetary Policy measures, the share price appreciation in select banking stocks was also on account of stock specific developments.  For instance, he explains, The South Indian Bank stock has rallied as the bank is seen coming out of a Non-Performing Assets down-cycle; while RBL Bank reacted to Emirates NBD deal.  The latest RBI rate cut may not be positive for banks believes, Vijayakumar; as he believes it will further compress Net Interest Margins (NIMs) of banks and the lenders will find it difficult to mobilise deposits.  The banks would ideally have wanted a 'No' rate cut with 'Status Quo' policy as the previous 100 bps rate has not yet been transmitted, the analyst added.    Data further shows that as many as 20 private and public-listed bank stocks have gained over 20 per cent in this period. Banking indices such as the Nifty PSU Bank index has zoomed 33 per cent, while Nifty Private Bank index has gained 15 per cent. Both, outperforming the NSE Nifty 50 index, which has advanced 10.5 per cent in the same period.  Meanwhile, Kranthi Bathini, Equity Strategist at WealthMills Securities expects the rally in banking stocks to continue. The analysts believe that banking and financial services related stocks are likely to outperform in the coming quarters in anticipation of healthy earnings in the coming quarters.    Among individual large banks - state-run SBI has soared over 28 per cent in the same period; while private-sector majors - HDFC Bank and ICICI Bank have gained 15 per cent and 10 per cent respectively, shows data.