The Indian financial markets witnessed a significant event as the Nifty Bank index surged past the 56,000 mark for the very first time on Tuesday. This historic achievement was primarily driven by optimistic sentiment among investors, fueled by widespread anticipation of an interest rate cut by the Reserve Bank of India (RBI). However, the initial euphoria was tempered as the index subsequently relinquished some of its early gains due to profit-booking activities and emergent weakness in several heavyweight banking stocks.

The banking index soared to an unprecedented lifetime high of 56,161.40 shortly after the market opened. Despite this strong start, it later dipped into negative territory by mid-morning. Early bullish momentum was supported by robust buying interest in lenders such as AU Small Finance Bank, Federal Bank, Punjab National Bank, HDFC Bank, and IndusInd Bank, which saw their stock prices rise between 0.4% and 1.2%. Conversely, larger banking institutions including ICICI Bank, Axis Bank, and Kotak Mahindra Bank exerted downward pressure on the index, with their shares falling by up to 0.9%.

Notwithstanding the intraday volatility and pullback, the Nifty Bank index has established itself as one of the top-performing sectoral indices in 2025. Year-to-date, it has registered a commendable gain of 10%. Furthermore, it has delivered a solid 9.7% return over the past twelve months and stands 15% higher than its 52-week low, underscoring a growing confidence among investors regarding the outlook for the banking sector.

All eyes are now on the Reserve Bank of India's upcoming Monetary Policy Committee (MPC) meeting, scheduled for June 6. Expectations are high for a reduction in the benchmark lending rate. Under the leadership of Governor Sanjay Malhotra, the RBI has already implemented two rate cuts in its recent policy reviews, cumulatively lowering the repo rate by 50 basis points from 6.5% down to its current level of 6%. Market economists and analysts widely anticipate another rate cut in the forthcoming meeting, continuing the current monetary easing cycle.

Expert opinions vary slightly on the quantum of the potential rate cut. Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, suggested that “since the MPC is expected to cut the policy rate by 25 bps in the meeting on the 8th, rate-sensitives are likely to be favoured in the coming days,” citing declining inflation and supportive macroeconomic conditions as key enablers for further policy action. Meanwhile, brokerage firm SBI Securities has projected a more substantial “50-basis point rate cut in June '25 policy,” viewing it as a “jumbo rate cut” that could act as a counterbalance to prevailing market uncertainties. SBI Securities also noted that, “for the first time; liabilities are getting repriced faster in a rate easing cycle,” and pointed out that “banks have already reduced interest rates on savings accounts to a floor rate of 2.70%.”

Adding to the positive economic sentiment, India reported strong Gross Domestic Product (GDP) growth of 7.4% for the March quarter of the fiscal year 2025. This figure represents the strongest quarterly expansion in FY25, accelerating from a 6.2% growth rate recorded in the third quarter. For the full fiscal year FY25, India’s economy grew by 6.5%, aligning with estimates and reaffirming its position as the world's fastest-growing major economy, as highlighted by Dr. Manoranjan Sharma, Chief Economist at Infomerics Valuations and Ratings.

With rate-sensitive banking stocks remaining in sharp focus ahead of the RBI's crucial decision, traders and investors are meticulously observing market movements and awaiting clear signals from the central bank. The RBI's announcement, along with its forward guidance, will be pivotal in determining whether the current rally in banking stocks can be sustained or if a market reversal is on the horizon.