Indian equity benchmarks posted strong gains with the Sensex rising 582.95 points (0.72%) to close at 81,790.12 and the Nifty 50 advancing 183.40 points (0.74%) to end at 25,077.65. Banking and financial stocks led the rally after lenders reported strong quarterly loan growth.

Key Highlights

• HDFC Bank gained 0.90% and Kotak Mahindra Bank climbed 2.00% following robust loan growth reports.
• Bajaj Finance rose 1.90% after reporting a 24.00% year-on-year increase in assets under management.
• The IT sector rebounded with the Nifty IT index advancing 2.30%, extending gains to 3.20% over three sessions.
• Top gainers included TCS, Tech Mahindra, Axis Bank, Bajaj Finance and Eternal, rising between 2.00% and 3.00%.
• Mid-cap stocks gained 0.90% while small-caps added 0.30%.

Sector Performance

Banking and Financial Sector

Private banks are expected to outpace both industry and GDP growth over extended periods. Recent rate cuts, tax reductions, and liquidity infusion are anticipated to fuel near-term growth.

Consumption Sector

Benefiting from GST rationalization and potential shift of savings to discretionary items such as durables and autos.

Metals Sector

The ferrous metals segment is showing promise with good domestic volume growth, stronger balance sheets, and reasonable valuations.

IT Sector

IT stocks have reached attractive pre-COVID valuation levels, with earnings growth expected to improve in coming quarters.

Market analysts noted optimism ahead of quarterly earnings results, with expectations for improved consumer demand in the third quarter. As India's earnings season approaches, these sectors are positioned to potentially benefit from both policy support and market dynamics.

The Reserve Bank of India (RBI) has taken significant steps to increase banks' participation in capital markets, despite current exposure remaining limited. The top 12 banks in India have a combined capital market exposure of ₹2.5 lakh crore, representing just 1.8% of their total loan book of ₹138.5 lakh crore.

Leading Banks in Capital Market Exposure

Among major banks, Axis Bank leads the pack with a 4.03% exposure to capital markets, followed closely by ICICI Bank at 3.7% and Kotak Mahindra Bank at 2.9%. These figures highlight the conservative approach of Indian banks towards capital market lending, even as retail participation in the markets continues to grow.

RBI's New Lending Limits

In a move to boost capital market activity, the RBI has implemented several key changes:

1. Increased the loan limit against shares from ₹20 lakh to ₹1 crore
2. Raised IPO financing limits from ₹10 lakh to ₹25 lakh per person
3. Removed the regulatory ceiling on lending against listed debt securities entirely

These measures are expected to provide a significant boost to capital market participation and potentially increase banks' exposure to this sector.

Positive Market Response

The banking sector responded positively to these regulatory changes, with notable gains in key banking stocks:

The Nifty Bank index reflected this optimism, gaining 712 points to close at 55,348.

Retail Investor Participation

The RBI's move comes at a time of growing retail investor participation in the capital markets. Currently, individual investors are channeling approximately ₹26,400 crore monthly into mutual fund schemes through Systematic Investment Plans (SIPs). This steady inflow underscores the increasing importance of retail investors in India's capital markets.

Outlook

While the RBI's new measures are designed to encourage greater bank participation in capital markets, it remains to be seen how quickly and to what extent banks will increase their exposure. The current 1.8% exposure level suggests there is significant room for growth, but banks may continue to approach this sector cautiously, balancing potential returns against risk management considerations.

As the effects of these regulatory changes unfold, market observers will be keenly watching for shifts in banks' lending patterns and any corresponding impact on capital market dynamics. The coming months may provide valuable insights into the effectiveness of the RBI's strategy in fostering a more robust and diverse financial ecosystem in India.