Why did the banking and auto stocks react positively to the RBI monetary policy?

Most rate sensitives like banks, NBFCs, autos and realty did well on Friday after better than expected cues from the monetary policy. For example, the Monetary Policy Committee or the MPC kept repo rate unchanged at 4% but more importantly it chose to maintain its accommodative stance of the policy. That assures low rates and adequate liquidity.

The reverse repo rate stayed at 3.35% and the bank rate stayed put at 4.25%. For banks and other rate sensitive sectors, this was a clear indication that rates would remain low in the foreseeable future. Also, the government will keep the liquidity taps running so supply of cash with banks will ensure easy transmission of rate cuts also to the end borrowers.

On Friday, key rate sensitive indices reacted positively. For example, the Nifty Bank, Nifty Auto and Nifty Financial Services were up in the range of 1.0% to 1.5%. Even the Nifty Realty index was up 0.63%, despite larger structural problems. Most NBFCs also rallied sharply in the aftermath with PFC and Bajaj Finance among the key gainers.

A bigger boost to the rate sensitives also came from the growth outlook. For example, the RBI expects the Indian economy to contract at just about 7.5% in FY21 as against its original estimate of 9.5%. This trend has been largely led by a spurt in rural demand the urban demand is also expected to catch up in tune with lifting of the lockdown.

The very fact that the RBI policy has prioritised growth over inflation is gratifying for the markets. This will also result in a smooth borrowing program of the government in the midst of surging fiscal deficit.