Sensex and Nifty Rebound From Intraday Lows as Bank Stocks Rally After RBI Hikes Repo Rate to 5.50%

Indian benchmark equity indices clawed back a significant portion of their morning losses on Wednesday, October 7, 2026, after the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) raised the key repo rate by 25 basis points. A swift rally across frontline banking and financial services stocks helped Dalal Street absorb the central bank's first rate increase in nearly four years.

The BSE Sensex had plunged over 450 points to an intraday low of 72,520.73 as RBI Governor Sanjay Malhotra commenced his policy address. However, once the decision was announced, aggressive buying in private and public sector lenders helped the benchmark recover to 72,773.12. Similarly, the NSE Nifty 50 recovered from its intraday trough of 22,578.25 to trade around the 22,648 mark.

Key Decisions from the RBI Policy Review

The MPC's unanimous policy outcome delivered an adjustment aimed at curbing inflationary pressures while maintaining economic stability:

• Repo Rate: Increased by 25 basis points from 5.25% to 5.50%.
• Facility Rates: The Standing Deposit Facility (SDF) rate was adjusted to 5.25%, while the Marginal Standing Facility (MSF) rate and Bank Rate moved up to 5.75%.
• Policy Stance: Shifted from "neutral" to "calibrated tightening" by a majority decision, marking the first such stance revision since October 2018.
• Inflation Projections: The RBI raised its FY27 inflation projection to 5.1%, citing sticky retail prices and crude oil trading above $100 per barrel amid ongoing geopolitical tensions in West Asia.

Banks Lead Dalal Street Turnaround

Banking and financial shares served as the anchor for the market's afternoon recovery. While rate increases typically raise funding costs, market participants recognized that immediate resets in external benchmark-linked floating loans tend to boost net interest margins (NIMs) for major commercial banks faster than deposit rates catch up.

Top Performers in the Financial Space:

• Kotak Mahindra Bank: Advanced over 2.0%, emerging as one of the leading gainers on the benchmark indices.
• State Bank of India (SBI): Rose firmly into positive territory, lifting the Nifty PSU Bank index.
• Axis Bank and Bajaj Finance: Both recorded steady gains, adding substantial upward momentum to the Nifty Bank index.

The Nifty Bank index reversed early morning losses to trade near 55,153, with both state-owned and private lenders outpacing the broader market.

Sectoral Divergence and Market Breadth

While the banking basket remained buoyant, broader rate-sensitive sectors faced pronounced headwinds under the higher interest rate regime:

• Nifty Auto: Dropped 1.5% to trade around 25,163.10 as concerns over higher vehicle financing costs dampened investor sentiment.
• Nifty Metal: Declined 1.5% to 12,411.70, tracking softer commodity cues and elevated borrowing expenditures.
• Nifty Realty and FMCG: Slid approximately 1% each as higher mortgage rates and inflation-related input costs weighed on near-term demand projections.

In the currency and debt markets, the policy tightening saw India's 10-year benchmark bond yield firm up to 7.27%. The Indian rupee slipped to historic lows near 96.86 per US dollar, pressured by sustained foreign institutional outflows and elevated crude import bills.

Investor Takeaway

Market analysts highlighted that Dalal Street had already discounted a 25-basis-point hike following the prolonged sell-off in previous weeks. By removing policy ambiguity, the RBI's decision allowed investors to redirect capital into fundamentally strong financial institutions that stand to gain from credit growth and asset repricing. However, with the central bank shifting into a calibrated tightening cycle, market participants are advised to maintain caution in high-debt, interest-rate-sensitive counters until commodity inflation cools.

Tags: Reserve Bank of India BSE Sensex Nifty 50 Nifty Bank Kotak Mahindra Bank State Bank of India