The Bank Nifty index outperformed the benchmark Nifty50 on Wednesday as the last-minute temporary ceasefire in Iran converged with the RBI's Monetary Policy Committee (MPC) decision.
The Bank Nifty index is trading 5% higher at 55350 against the benchmark's 3.6% rise to 23949.
"I expect the Bank Nifty to outperform the broader Nifty and trade in a 52500-54500 range with a bias to the upside, thanks to the ceasefire news, which comes as a massive relief," said Shrikant Chouhan, head of research at Kotak Securities.
Chouhan said Reserve Bank of India (RBI) governor Sanjay Malhotra's commentary against the backdrop of the war would be "closely parsed " by the market.
"Though the ceasefire is temporary, it comes as a massive relief , and will be reflected in bank shares rallying , as banks indicate the health of the economy," said Sudhir Joshi, consultant at Khambatta Securities.
"I expect a 3-4% upside in Bank Nifty with any dip being bought into by institutional investors," added Chouhan.
Joshi too expects the Bank Nifty to outperform Nifty, though he didn't specify a target.
The RBI's rate-setting committee has held the repo rate – the rate at which the central bank lends to banks – at 5.25% and retained its stance as neutral, allowing it to move in either direction depending on the evolving West Asia event and its impact on the economy.
The rupee has slipped 2.2% to 92.99 since the war began on 28 February through Tuesday. Brent crude, which traded down 12.7% at $95.36 a barrel early Wednesday morning, lost the ceasefire announcement, but still traded 32% higher since the outbreak of the war.
Interestingly, options sellers insulated themselves against outsized moves on Bank Nifty.
Ahead of Wednesday's ceasefire and the MPC policy decision, they sold call and put options at 52700 strike for a total of ₹2980 a share (30 shares make one contract) , implying a range of 49720- 55680 from yesterday through 28 April when the contracts expire.
That works out to an 11.3% range over Tuesday's closing. Any breach of this range will expose them to huge losses.
The Bank Nifty comprises 14 stocks led by HDFC Bank, ICICI Bank , Axis Bank , SBI and Kotak Mahindra Bank.