In line with market expectations, the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) reduced the repo rate by 25 basis points (bps) to 6.25 per cent.
This marks the first rate cut since May 2020, when the central bank had lowered rates to mitigate the economic impact of the pandemic.
The monetary stance remains neutral, with the Standing Deposit Facility (SDF) rate set at 6 per cent and the Marginal Standing Facility (MSF) rate and Bank Rate at 6.50 per cent.
“The MPC decided unanimously to reduce the policy repo rate by 25 basis points from 6.50 per cent to 6.25 per cent. The MPC also decided unanimously to continue with the neutral stance and remain unambiguously focused on a durable alignment of inflation with the target while supporting growth,” said the RBI Governor.
The decision comes amid slowing global growth and inflationary risks that continue to challenge economic stability.
The RBI has projected real GDP growth for FY26 at 6.7 per cent while acknowledging global headwinds.
The stock markets reacted negatively to the RBI’s decision to cut the policy repo rate though, with the BSE Sensex closing in the red by 0.25%, and Nifty 50 closing down by 0.18%.
Garima Kapoor, Executive Vice President – Economist at Elara Capital, attributed the market reaction to two key factors.
First, traders had been expecting additional liquidity measures, particularly a CRR cut, which did not materialize.
Second, the RBI’s decision to maintain a neutral stance, rather than providing a clear signal for an easing cycle, created uncertainty about the timing of future rate cuts.
Additionally, consumer stocks have continued to underperform following the Union Budget, as investors await tangible signs of a pickup in consumption.
According to Business Today, Kapoor views this as a short-term reaction, noting that the RBI’s liquidity management over the past 15 days suggests a commitment to maintaining sufficient liquidity in the system.
Here are the sectors and stocks that could gain:
Rate-sensitive sectors of auto, banking, to gain
The rate cut is expected to provide a boost to rate-sensitive sectors such as banking, auto, and real estate.
Experts believe that lower borrowing costs will spur credit demand, benefiting financial services and housing markets.
Anil Rego, Founder and Fund Manager at Right Horizons, noted that non-banking financial companies (NBFCs) are well-positioned to benefit from the move.
“Credit-sensitive sectors like auto and real estate will see higher demand,” he said.
Vinit Bolinjkar, Head of Research at Ventura Securities, echoed this sentiment.
“The rate cut, coupled with recent liquidity-boosting measures, is expected to drive fresh investments and kick-start the consumption cycle. Sectors such as banking, auto, FMCG, consumer durables, manufacturing, and NBFCs are all poised to benefit,” he stated.
Market analysts also highlighted that government initiatives, including middle-class tax relief, in combination with lower interest rates, could strengthen consumption-driven growth.
Deepak Ramaraju, Senior Fund Manager at Shriram AMC, said that discretionary spending and premiumisation themes are likely to outperform.
“Sectors like automotive, real estate, and discretionary segments such as jewellery, durables, and white goods might do relatively better. Travel and tourism, quick service restaurants could also see demand remain buoyant,” he added.
Banks with fixed-rate portfolios to benefit
While the overall banking sector stands to gain from increased lending activity, not all lenders may see immediate benefits.
Naveen Kulkarni, Chief Investment Officer at Axis Securities PMS, pointed out that the credit growth momentum in banks has slowed due to asset quality concerns, particularly in unsecured lending.
“The rate cut is a positive for lenders with a higher share of fixed-rate portfolios, such as credit card issuers, vehicle financiers, and gold financiers. However, banks with a higher proportion of floating-rate loans may face near-term headwinds on margins,” he explained.
Kulkarni identified Bajaj Finance, Cholamandalam Investment & Finance, and Shriram Finance as key beneficiaries of the rate-cut cycle.
About impact on profitability of banks, Sachin Sachdeva, vice president, sector head, financial sector ratings at ICRA said he expected net interest margins (NIM) as percentage of the advances to contract by 15bps for the banks, which will lead to a decline of 0.80% in ROE for banks.
Within banks, the impact on private banks is expected to be higher at 20 bps and 0.85% compared to 10bps and 0.76% for public banks.
The impact will be higher for private banks because of their higher share of EBLR loans compared to public sector banks, he said.
Bond market outlook improves as yields fall
The bond market has responded positively to the rate cut, with the 10-year benchmark bond yield dropping by 20 basis points.
Falling interest rates have made existing bonds more valuable, boosting demand for debt mutual funds and long-duration bonds.
Divam Sharma, Co-Founder and Fund Manager at Green Portfolio PMS, highlighted the potential benefits for debt market participants.
“With yields declining, debt mutual funds and long-duration bonds become more attractive. Lower borrowing costs could also aid capital expenditure in sectors like infrastructure and manufacturing, supporting overall economic activity,” he said.
Sonam Srivastava, Founder and Fund Manager at Wright Research PMS, noted that the declining interest rate environment would encourage capital inflows into debt instruments.
Crypto gains appeal as investors seek alternative assets
The rate cut has also led to renewed interest in alternative assets such as cryptocurrency.
Sumit Gupta, Co-Founder of CoinDCX, stated that the RBI’s move signals a shift towards stimulating economic activity and fostering liquidity.
“From a capital markets perspective, this rate reduction serves as a catalyst for investor confidence, creating a favourable environment for increased capital flows across various asset classes. In a scenario where high interest rates often deter investment in alternative assets, the lowering of rates encourages a search for alternative avenues of growth,” Gupta explained.
He added that with fixed deposits becoming less attractive, investors are more likely to explore diversified options, including crypto assets.
“With the advent of FIU-compliant exchanges, crypto offers a secure opportunity for portfolio diversification,” he said.
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