You might have see the word "cash reserve ratio" in the head lines last week and that contributed the rally on Nifty and Sensex.
The news is "India’s RBI cuts cash reserve ratio to 5.5% from 6%, leaves interest rates unchanged."
What is cash reserve ratio here?
Cash Reserve Ratio is one of the bank regulation and this sets the minimum reserves one bank must hold to its customer deposits. In India, this is the amount of fund that a bank must keep with RBI. If RBI decrease the cash reserve ratio, then the available funds for the bank would be more and that does provide more liquidity in the market. Banks can lend more money to the customers or invest on something else.
When the news came out banks outperformed the overall sector as it is a very good news for the banks.