Several banking equities, including HDFC Bank, ICICI Bank, and SBI, rose on Wednesday, December 4, boosted by expectations of supportive monetary policy from the Reserve Bank of India (RBI) following recent macroeconomic data indicating a slowdown in India's development rate.

The entire financial landscape is brimming with optimism. The Nifty Bank and Private Bank indexes both surged almost 1% in intraday trade on Wednesday, while the PSU Bank index increased by nearly 1.5 percent. The Nifty Financial Services index climbed by more than 1%.

Financial companies are increasing as the market anticipates a CRR (cash reserve ratio) drop on Friday, which would increase profitability.

What is pushing banking stocks higher?

The Nifty Bank index has been trading higher since last Friday, with optimism that the RBI will unveil policy measures to promote economic growth, which has showed symptoms of weakness.

India's Q2FY25 GDP growth rate was 5.4%, the lowest in over two years and the third consecutive quarter of fall.

India's central bank is expected to lower the CRR in order to pump cash into the banking system and increase lending. This will improve the profitability of financial firms.

Aamar Deo Singh, Senior Vice President of Research at Angel One, believes banks would gain from a reduction in the CRR, which is now at 4.5%. This would increase their flexible resources and, thus, their profitability.

"This immediate rate cut in CRR is expected to enhance liquidity in the market," Pandya said.

Pandya emphasized that Q2 figures reveal that overall credit growth has decreased to 12-13 percent, down from 17-18 percent. A lowering in the CRR could help to reactivate credit growth.

According to Bigul's CEO, Atul Parakh, the rise in banking stocks might be driven by solid loan growth, reducing NPAs, favorable corporate profit trends, probable interest rate decreases, seasonal demand increases, and foreign investment flows.

According to Parakh, banks may continue to be positive about this trend as long as they maintain their credit growth momentum and profitability levels.

The RBI's Monetary Policy Committee (MPC) met on Wednesday, December 4, and the policy decision will be revealed on Friday, December 6.

Some experts predict a 25 basis point rate drop from the RBI following the Q2 GDP shock. If it comes to fruition, it will greatly benefit interest-sensitive financial equities.

While the RBI factor underpins the overall financial sector, the PSU banking market is being driven by another driver: the impending Union Budget 2025.

According to Anshul Jain, Head of Research at Lakshmishree Investment and Securities, PSU bank stocks are increasing ahead of the RBI MPC meeting, which is expected to result in rate cuts. The market anticipates a 25 basis point rate drop from the RBI Governor Shaktikanta Das-led monetary committee. Furthermore, Dalal Street bulls are keeping an eye on PSU stocks as the Union Budget 2025 approaches.

"PSU and infra stocks become bullish in December and remain positive until the Budget is presented," according to Jain.