Benchmark indices Sensex and Nifty were flat in Friday's trade, with ITC Ltd, Reliance Industries Ltd and a few rate sensitive banking and financial names capping the upside after the Reserve Bank of India (RBI) announced a 25 basis points cut in the repo rate, the first since May 2020. The RBI easing cycle generally starts with a surprise, with 2019, 2015 and 2012 being some examples. But this was not the case on Wednesday. The MPC members, led by the new Governor Sanjay Malhotra, opted to keep policy stance 'neutral'.
The RBI forecast India’s GDP growth rate at 6.7 per cent in FY26. It sees growth at 6.7 per cent in Q1, 7 per cent in Q2 and 6.5 per cent each in Q3 and Q4, saying the risks are evenly balanced.
"It was widely anticipated that the RBI will deliver a rate cut and hence the market has not reacted much to the rate cuts. In fact, the India 10 year bond yields have spiked as the committee unanimously voted to continue with the neutral stance. We believe that this rate cut is a welcome step in the right direction by the RBI. However, the quantum and timing of further rate cuts will depend a lot on how the Fed moves forward," said Apurva Sheth of SAMCO Securities.
Viram Shah, CEO at Vested Finance said the rate cut will likely further narrow the US-India bond yield spread that is already at 20-year low, making the US bonds more attractive to foreign investors. This may lead to more outflows in coming months leading to investments into US bonds and stock markets," he said.
Ajay Garg, CEO at SMC Global Securities said a rate cut can put pressure on the Indian rupee and increase outflows from the country. Sheth of SAMCO Securities said the RBI has to support the ailing rupee, which is at an all-time low and there fore the RBI has limited scope for rate cuts going forward.
The BSE Sensex was trading at 78,074.72, up 16.56 points or 0.02 per cent. Nifty stood at 23,618.55, up 15.20 points or 0.06 per cent. India VIX eased 3.4 per cent to 13.69.
ITC fell 2.28 per cent to Rs 431.45, as investors were worried over weak urban demand, a rise in raw material prices and a weak profitability in FMCG and paperboards, paper & packaging segments. State Bank of India and Bajaj Finance declined 1.13 per cent each. ICICI Bank and Axis Bank slipped up to 0.7 per cent. Power Grid, TCS, Hindustan Unilever and Reliance Industries fell up to 1 per cent.
In the broader market, 1,945 were trading lower against 1,596 stocks that jumped. A total of 158 stocks hit their 52-week low. "On our estimates, every 5 per cent of rupee depreciation pushes up CPI inflation by 0.26pp, core CPI inflation by 0.10pp and GDP growth by 0.20pp. With weak global demand and soft consumption, we expect the currency impact on exports and inflation to be more muted this time," Nomura said.
Vikram Chhabra, Senior Economist at 360 ONE Asset said The RBI’s decision to cut the repo rate by 25 basis points aligns with his expectations.
"This move is a logical progression following the shift to a neutral policy stance in October 2024 and the Cash Reserve Ratio (CRR) reduction in December 2024. Economic growth has been disappointing, with repeated downward revisions to estimates, and requires policy support. The budget has provided essential fiscal support while upholding fiscal discipline, and the RBI has reinforced this by initiating monetary easing," he said.
Here's what analysts and economists said on the RBI rate cut:
Unmesh Kulkarni, Managing Director Senior Advisor, Julius Baer India
A more flexible approach to rate targeting suggests the central bank may not wait for CPI to hit 4 per cent before acting—marking a shift from its earlier tightrope strategy. Liquidity management remains a priority, with the RBI committed to ensuring sufficient but not surplus liquidity, which could leave markets slightly disappointed. A back-to-back 25 bps rate cut in April is possible but contingent on the evolving liquidity scenario in the coming months.
Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS.
The credit growth momentum for banks has evidently slowed down either owing to a cautious approach towards lending amidst asset quality concerns in the unsecured segment or softening demand. Kulkarni sees positive levers for supporting credit growth revival from the recent budget announcements. The rate cut can be viewed as a positive for lenders having a higher share of fixed rate portfolio, especially credit card issuers, vehicle financiers and gold financiers, he said.
"On the other hand, banks with a higher share of floating-rate loans would continue to face near-term headwinds on margins. We would remain watchful of asset quality trends for banks, especially those with meaningful exposure to unsecured lending, wherein recovery is still a couple of quarters away. Currently, we prefer Bajaj Finance, Cholamandalam Inv & Finance and Shriram Finance as they would be key beneficiaries in the rate cut cycle," he said.
Rajeev Radhakrishnan, CIO - Fixed Income, SBI Mutual Fund.
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. Overall, the weaker than anticipated growth over the previous year and projection on CPI for FY26 closer to the target has provided confidence to the RBI to ease rates.
Radhika Rao, Executive Director and Senior Economist, DBS Bank An emphasis on the flexibility of the inflation targeting framework suggests the MPC might be more tolerant of intermittent modest supply driven volatility. The GDP forecasts point to growth staying below 7 per cent this year and the next. This made the RBI joining regional central banks, which have given higher weightage to domestic priorities, viewing volatility in their currency and bond markets as driven by global triggers.
"The MPC has refrained from an outright dovish signal by maintaining the stance at neutral. The recent rupee depreciation was not a hurdle for the policymakers, with intervention tools likely to be tapped to defend the currency vs dollar strength. We maintain our call for another 25 bps cut in repo rate in April," Rai said.
Mahendra Kumar Jajoo, CIO – Fixed Income, Mirae Asset Investment Managers (India)
Keeping in mind the prevalent volatile geopolitical situation, the policy stance has been retained as neutral. Guidance seems to hint at further rate cuts in coming quarters. There is strong guidance for providing adequate liquidity including injecting durable liquidity, which typically indicates more open market purchase operations of dated securities. Thus, the policy is a positive response to meaningful fiscal consolidation and guide path in the Union Budget, It seems to set the tone for a deeper easing cycle and possibly more rate cuts to follow.
Zarin Daruwala, CEO, India and South Asia, Standard Chartered Bank The MPC’s confidence around moderating inflation augurs well for sustained economic growth. The delay in implementing the revised LCR norms is likely to boost credit delivery and lower lending rates.
"The measures to further secure digital payments should facilitate adoption of digital channels. Furthermore, the announcements around introduction of forward contracts in government securities, increased access to the government securities trading platform and the review of trading and settlement timings, should enhance liquidity in market instruments,” Daruwala said.
Shriram Ramanathan, CIO, Fixed Income, HSBC Mutual Fund The new RBI governor Mr Sanjay Malhotra played out a balancing act, by easing rates, while clearly being mindful of the global market volatility and its potential impact on our currency, and hence maintaining a cautious tone. One can expect the RBI MPC to deliver another 25 bps cut at the April policy, while continuing to announce liquidity related measures as and when required on a “proactive” basis.
Dhawal Dalal, President & CIO-Fixed Income, Edelweiss MF
There was no forward guidance on policy rates. The stance is maintained at neutral. The RBI Governor has promised liquidity support as and when needed. That probably means the banking system liquidity will be proactively managed in Q4FY25.
Jigar Trivedi, Senior Analyst, Reliance Securities
This move comes amid a recent slowdown in economic growth and global trade uncertainty, as widely expected. The decision brings borrowing costs to their lowest level since January 2023. Regarding currency movement, the new Governor made it clear that it's decided by the market force and no specific band is targeted, which also means the RBI may not intervene in the currency market as expected. The rupee may stay volatile and the undertone is bullish in the USD-INR pair. Going ahead, 88.00 is a resistance for a short term.
Deepak Agrawal, CIO- Debt, Kotak Mahindra AMC
RBI has guided to ensure sufficient durable liquidity in the system and will take proactive measures for the same. Rate cuts along with assurance on liquidity should help in boosting consumption and revive growth. Inflation target has been pegged at 4.2 per cent and GDP Growth is pegged at 6.7 per cent for FY26. As policy was on expected line and no immediate measure for on liquidity front, 10 years G-sec has reacted by moving 4-5 bps higher post the policy announcement. One can expect an incremental 25 bps rate cut till June 2025.
Indranil Pan, Chief Economist. YES BANK
Pan thinks that the RBI will carry through with further rate cuts in April and thereafter. However, this rate cutting cycle may be shallow, he said.
A study by the RBI had indicated that the ideal real interest rate for the economy should be 100-150 bps. Given that there is now expectation for the economy growth to slump, Pan thinks that the RBI could be happy at keeping the real interest rate at around 150-160 bps.
"My base case is for the terminal repo rate at 5.75 per cent (another 50 bps cut from here on) and in the event that the RBI would want to make an insurance cut, the terminal rate can at best be at 5.50 per cent (75 bps from here on), he said.
Madan Sabnavis, Chief Economist at Bank of Baroda.
The cut in repo rate and the commentary does indicate that the MPC could be looking more at the inflation-growth dynamics going ahead, instead of only inflation that was the perception earlier. Therefore, one could expect more rate cuts based on economic data.
"We do think the GDP forecast made for next year at 6.7 per cent is very much doable. Inflation at 4.2 per cent will be contingent on both a good monsoon and limited impact of imported inflation. There could be an upside here given global uncertainty, and needs to be watched. The RBI has also clearly stated to the market that it is not targeting an exchange rate and will also ensure orderly liquidity in the market,” Sabnavis said.
Abhishek Pandya, Research Analyst, StoxBox
Today’s monetary policy meeting was in line with our expectations, though a change in stance from “Neutral” to “Accommodative” would have been an icing on the cake. The key takeaway for in the meeting was the central bank’s indication of following a flexible approach to the “flexible inflation targeting” model which essentially means that the future monetary policy would be more forward looking.
Going forward, a shallow rate cut cycle is likely from the central bank, with expectations of an additional 25 basis points rate cut in April monetary policy meeting along with additional liquidity measures in the near term considering the expected tight liquidity conditions in March 2025.
Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund. The decision to reduce the policy rates was unanimous and so was the decision to retain the policy stance at "Neutral". In the run-up to the policy, the bond market was expected a bit more from the RBI in terms of some liquidity measures, apart from the rate cut, and were a bit disappointed with lack of any further measures on liquidity and post-policy yields have retraced a bit with the benchmark 10-year Bond yield trading 4-5 bps higher at 6.70 per cent. Money Market yields were also higher by 5-7bps. Expect the broad range on the 10-year benchmark yield between 6.60 per cent and 6.80 per cent.
Prashant Pimple, Chief Investment Officer - Fixed Income, Baroda BNP Paribas Mutual Fund
The policy move is in line with the market expectations. The overall tone of the policy was dovish with economic growth to have taken precedence over inflation & currency concerns in this monetary policy. RBI’s intent to support growth is visible, while remaining watchful of global headwinds that could pose risk to domestic growth and inflation outlook. RBIs commitment to provide sufficient liquidity to the banking system was reiterated and was encouraging. Additional liquidity measures may be announced outside of MPC.
Siddharth Chaudhary, Senior Fund Manager - Fixed Income, Bajaj Finserv AMC
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 sees proactive action on liquidity going forward to support growth.