Sensex jumps 700 points after RBI keeps rates unchanged. What drove the Indian stock market higher? EXPLAINED

Stock market today: The Indian stock market experienced healthy buying across segments on Wednesday, October 1, following the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) 's decision to keep the repo rate and policy stance unchanged for the second consecutive meeting. After cutting rates by 50 basis points in June, the central bank left the benchmark interest rate unchanged in the August and September policy meetings.

RBI Governor Sanjay Malhotra-led Monetary Policy Committee (MPC) kept the repo rate unchanged at 5.5 per cent, and maintained the policy stance as ‘neutral’.

The Sensex jumped 800 points, or 1 per cent, to hit an intraday high of 81,068.43, while the Nifty 50 also rose by 1 per cent to hit an intraday high of 24,867.95.

Finally, the Sensex ended the day 716 points, or 0.89 per cent, higher at 80,983.31, while the Nifty 50 settled at 24,836.30, up 225 points, or 0.92 per cent. The BSE Midcap and Smallcap indices rose by a per cent each.

Why did the Indian stock market rise today?

The primary reason behind the rally in the Indian stock market is the surge in banking stocks. HDFC Bank, ICICI Bank, and Kotak Mahindra Bank were among the top contributors to the gains in the Sensex and the Nifty 50. The Nifty Bank index jumped by over a per cent after the RBI's status quo on interest rates.

Banking stocks surged as the RBI's decision to hold rates would mean no further pressure on the margins of banking players.

"Banking stocks are driving the benchmarks as the RBI's status quo has ensured there may be no further pressure on their margins at this juncture. Their immediate concerns over margin pressure have been put to rest," said Pankaj Pandey, the head of research at ICICI Securities.

Ajit Mishra, the SVP of research at Religare Broking, has similar views.

"Banking stocks have been under pressure in the recent past due to margin pressure. As the RBI has signalled favourable growth-inflation dynamics while maintaining rates, banking stocks are rising, driving the benchmarks higher," said Mishra.

Naveen Kulkarni, Chief Investment Officer at Axis Securities PMS, expects net interest margins (NIMs) to bottom out in Q2. Margins in the second half (H2) of the financial year should find support from deposit repricing and the cut in the CRR.

"Banks are seeing green shoots in terms of asset quality metrics and expect better outcomes from H2 onwards. We believe valuations for most banks are comfortable, and clarity on pick-up in growth and improving asset quality metrics would warrant upside in banking stocks. We currently prefer HDFC Bank, Kotak Mahindra Bank, SBI and Federal Bank," said Kulkarni.

While the in-line policy expectations limited the scope for a sharp reaction, the RBI’s upward revision of growth estimates and downward revision of inflation estimates were key factors behind the market’s rebound.

The RBI has raised India's FY26 GDP growth estimates to 6.8 per cent from the previously projected 6.5 per cent. The inflation forecast has been revised downward to 2.6 per cent for FY26 from the earlier projected 3.1 per cent.

"The downward revision of FY26 CPI inflation forecast to 2.6 per cent from 3.1 per cent reflects growing confidence that price pressures are well-anchored, aided by recent GST rationalisation and easing input costs. This creates room for further monetary accommodation later, potentially as early as the December meeting," said Anil Rego, the founder and fund manager at Right Horizons PMS.

Rego highlighted that the upward revision of FY26 GDP growth estimates also signals the RBI’s optimism regarding the underlying growth momentum, driven by strong government capital expenditure, resilient rural demand, and a gradual pickup in manufacturing activity.

"While external risks such as elevated US tariffs, currency volatility, and geopolitical tensions remain watch points, a supportive domestic policy backdrop provides a cushion. For markets, this pause coupled with dovish guidance is likely to be viewed positively," said Rego.

Rego believes that rate-sensitive segments, such as autos, housing finance, real estate, and consumption, could see improved demand as lending rates stabilise and transmission accelerates.

"Equities may benefit from sustained liquidity support, benign inflation, and improving earnings visibility, while bond markets could also price in a softer rate trajectory in the coming quarters," he said.

Read all market-related news here

Read more stories by Nishant Kumar

Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.