Nifty Bank on the cusp: Poised for breakout or reversal?

The NIFTY Bank index, which tracks the performance of the banking sector as formed a Stage-2 cup pattern. This is a bullish continuation pattern which is a second stage of the cup and handle pattern. A stock/index rallies after the cup and handle pattern breakout and then halts. When the halt is in the form a cup formation, it is referred to as a stage-2 cup pattern. The breakout of this cup increases the probability of further upside.

Given that retail inflation is well below the RBI’s threshold of 4%, the central bank is expected to cut the lending rates further. This may have already been discounted in the chart, which explains why the index seems to be stagnating.

Now, let’s understand the pattern, its implications and where the index might move if the pattern gives a successful breakout.

To understand the pattern, lets deep dive into the NIFTY Bank chart:

Considering the daily time frame, the index gave a Cup and Handle pattern breakout near the 52,000 mark on April 15, 2025. On that day, the index witnessed a breakaway gap-up opening, suggesting a strong dominance of buyers after the formation of a base. The index sustained the breakout level at closing, and the success of the pattern was evident with a sharp upsurge in the index up to the target of around 56,000.

After a sharp rally, the index is seen consolidating at the peak for almost a month. However, the point to be noted here is that NIFTY Bank formed a Stage-2 Cup pattern during the consolidation. Stage-2 Cup pattern is generally a bullish continuation pattern of the prior Cup and Handle pattern.

The Stage-2 Cup is a shallow and rounded base, which represents a healthy consolidation after an uptrend, where prices seem to be halting before another rally.

The pattern works best when it is formed in a strong sector like Banking, which is said to align with the institutional buying theme.

The breakout confirms the pattern if it is supported by other indicators like a rising relative strength index (RSI) etc.

Here are a few reasons why the NIFTY Bank boomed from mid-March and may continue the positive momentum going forward.

1. Rate-cut buzz

The expectations and the actual 25 bps interest rate cut by the RBI in the April 2025 monetary policy boosted overall market sentiments, and specifically the banking sector. Moreover, the accommodative stance by the RBI signalled further easing. Banks stocks witnessed momentum with the expectations of higher borrowing volumes. Going forward, the RBI is expected cut interest rates twice, i.e. one in June and one in August, with inflation well below 4%.

2. Falling retail inflation

The retail inflation has been constantly falling since the start of calendar year 2025 and is well within RBI’s tolerance limit of 2-6% and the 4% medium term target. It fell from 4.59% in January to 3.79% in February down to 3.34% in March and ultimately 3.16% in April. Banks posted better quarterly performance in Q1FY26 and the rally still continues.

3. Current scenario

To infuse more liquidity into the banking system, the RBI has taken a step forward. It has increased net forex purchases through forex swaps to $25 billion in the first quarter of 2025, hitting a four-year high. This means the central bank has conducted 3 dollar-rupee swap i.e. buying dollars in exchange for rupees.

All said and done, the breakout of the Stage 2 Cup pattern would decide the fate of Bank Nifty index going forward. We may come to know whether the sentiments are still hopeful with banks posting better upcoming quarter. On the contrary if the positive outcomes have already been discounted we may see some pullback from the current peak zone.