Dec 5 (Reuters) - India's stock benchmarks inched higher on Friday, led by domestic rate-sensitive financials, after the central bank lowered the key interest rate by 25 basis points.
The Nifty rose 0.23% to 26,093.55 and the Sensex added 0.25% to 85,479.03 as of 10:47 a.m. IST.
The Reserve Bank of India lowered its key repo rate as record low retail inflation and a benign outlook for prices provided room to further support economic growth.
Heavyweight financials rose 0.6%, while banks and state-owned lenders rose 0.4% and 0.5%, respectively, after the rate cut decision.
Lower rates make borrowing cheaper, aiding loan demand and reducing funding costs, which help banks and non-bank lenders.
Cheaper loans improve the affordability of vehicles and homes and support demand in the auto and real estate sectors.
Rate-sensitive auto rose 0.2%, while realty stocks gained 0.7%.
"The central bank's decision to cut the repo rate is a distinct positive for the real estate sector as we close 2025," said Anuj Puri, chairman of ANAROCK Group.
"The move further sweetens the value proposition for homebuyers, especially in the affordable and mid-income segments," Puri said.
Eight of the 16 major sectors advanced. The broader small-caps fell 0.6%, while mid-caps traded flat.
India's stock benchmarks have seen profit taking since hitting record highs last week and are trading 1% below lifetime peaks. The RBI rate cut and a likely U.S. rate reduction next week could help power a short-term rally in markets, supporting a so-called Santa Claus rally, analysts said.
"The strengthening market outlook due to improving earnings is further supported by the RBI rate cut," said Rahul Singh, chief investment officer of equities at Tata Asset Management.
With a likely U.S. rate cut next week, there is "valuation comfort for Nifty, which is now trading at nearly 21x forward earnings," Singh said.
(Reporting by Bharath Rajeswaran in Bengaluru; Editing by Sonia Cheema, Sumana Nandy and Nivedita Bhattacharjee)
By Bharath Rajeswaran
