Nifty Bank Registers Highest Single-Day Gain in Over 7-Month: Here’s What Happened

The Nifty Bank index, known for its high volatility witnessed an extraordinary single-day surge of 2.17% or 1,043 points by midday on January 28, 2025. This marks the index’s sharpest gain in over 7 months, following a challenging streak of 3 consecutive days of decline. The last time the index recorded such a significant movement was in June 2024, reflecting the rarity of this rally.

Context: Why the Nifty Bank Rally Over 1,000 Points?

The dramatic uptick in the Nifty Bank index can be attributed to the Reserve Bank of India’s (RBI) announcement of substantial liquidity measures. On January 28, the RBI infused ₹1.5 lakh crore into the banking system, primarily through Open Market Operations (OMO) purchase auctions of government securities, Variable Rate Reverse Repo (VRR) auctions, and currency swap auctions. These measures aim to address a critical liquidity deficit in the financial system, which was running at ₹3.1 lakh crore, approximately 1.5% of total system deposits.

Driving Forces Behind the Rally

1. RBI’s Liquidity Infusion:
   The infusion of ₹1.5 lakh crore came as a significant relief to the banking sector, bolstering confidence among investors. These measures, combined with earlier initiatives such as the Cash Reserve Ratio (CRR) cut and daily VRR auctions, have started to normalise liquidity conditions in the money markets.
2. Rate Cut Speculation:
   Market sentiment was further buoyed by reports suggesting the possibility of a rate cut in the upcoming RBI policy meeting on February 7, 2025. A reduction in interest rates could potentially spur economic growth, benefiting the financial sector.

Performance of Major Constituents

Interestingly, nearly all constituents of the Nifty Bank index were trading in green by midday, except for Federal Bank. HDFC Bank emerged as the top contributor with a jump of over 3%, followed closely by ICICI Bank, which surged 2.55%.

Significance of the Liquidity Measures

The RBI’s proactive steps to address liquidity challenges have instilled confidence in the market.

• CRR Cut: Announced in the last monetary review, this measure began alleviating liquidity stress.
• Daily VRR Auctions: These auctions have provided consistent short-term liquidity to the banking system.
• OMO Purchase: Over the past two weeks, screen-based OMO purchases have added an estimated ₹1 trillion of core liquidity.
• Longer-Term Repo Auction: An additional ₹50,000 crore infusion through a longer-term repo auction has further supported liquidity requirements.

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