No major cheer in the market after RBI repo rate cut

NEW DELHI: India’s equity market benchmarks, the BSE Sensex and NSE Nifty 50, initially fell sharply following the RBI’s announcement of a repo rate cut. However, the indices quickly rebounded and were trading with minor gains by 11:55 am.

Amid high volatility, the Sensex fluctuated between a low of 77,730 and a high of 78,357, while the Nifty touched a low of 23,439.60 and a high of 23,694.50.

“Market reaction clearly shows that there was an expectation of even more easing in terms of liquidity and even change in stance. But note that the governor has pointed out proactive action on liquidity going forward to supporting growth,” said Siddharth Chaudhary, Senior Fund Manager - Fixed Income, Bajaj Finserv AMC

The Monetary Policy Committee (MPC) of the Reserve Bank of India, led by Governor Sanjay Malhotra, cut the repo rate by 25 basis points to 6.25 per cent. This is the first-rate cut by the central bank in five years. 

This decision comes a week after the government decided to cut personal income tax to boost consumption. The announcement is also made amid a slowdown in India’s economic and corporate earnings growth, falling rupee against the dollar, and global economic uncertainty, with US President Donald Trump imposing tariffs on Canada, Mexico, and China. These factors are currently weighing on market sentiments. 

Sonam Srivastava, Founder and Fund Manager at Wright Research PMS said that given that retail inflation has softened to 5.22% in December, closer to the RBI’s 4% target, there is potential for further easing if price pressures continue to moderate. 

“However, the central bank remains cautious, acknowledging risks such as volatile crude oil prices, global financial uncertainty, and fiscal measures introduced in the Union Budget,” added Srivastava. 

He explains that the RBI will closely monitor inflationary trends and liquidity conditions. The neutral stance ensures flexibility in responding to evolving macroeconomic factors, including potential rate cuts by the US Federal Reserve and European Central Bank. Additionally, the RBI’s commentary on credit flow, banking sector resilience, and fiscal policies will play a crucial role in shaping investor sentiment in the coming months.

“From a market perspective, this rate cut is expected to have a positive impact on rate-sensitive sectors. Banking and financial stocks may see increased credit demand, improving net interest margins in the near term. The real estate sector stands to benefit as lower interest rates on home loans could boost housing demand. Similarly, consumer durables and auto segments may experience higher sales, particularly in the premium category, as financing costs decline,” stated Srivastava. 

Anil Rego, Founder and Fund Manager at Right Horizons said that NBFCs are better positioned to benefit from cuts in rates as credit growth will improve followed by banks. Also, credit-sensitive sectors like auto and real estate will see higher demand, he added. 

Rajeev Radhakrishnan, CIO - Fixed Income, SBI Mutual Fund said that while the rate cut was clearly subjective, the lack of specifics on liquidity could potentially impeded transmission. “While yields have moved up a bit, it is anticipated that the RBI would continue to ensure targeted infusion of liquidity over the coming months that should enable yields to stay anchored,” said Radhakrishnan.

Shriram Ramanathan, CIO, Fixed Income, HSBC Mutual Fund said that RBI MPC disappointed the market by retaining stance at neutral (unanimously) and not announcing any specific new measures on liquidity injection.  

“We expect the RBI MPC to deliver another 25bps cut at the April policy, while continuing to announce liquidity related measures as and when required on a “proactive” basis. While the initial reaction of bond markets has been one of disappointment, with yields inching up a few basis points, we believe interest rates will continue to soften over the next few months and retain our positive duration bias and outlook,” added Ramanathan.