The Reserve Bank of India (RBI) Monetary Policy Committee has reduced the repo rate to 6.25 percent, in line with market expectations.
This is the first rate reduction since May 2020 when the central banks lowered rates in order to reduce the economic impact of pandemic.
The monetary policy remains neutral with the Standing Deposit Facility rate (SDF) set at 6 percent and the Marginal Standing Facility rate (MSF) and Bank Rate at 6,50 percent.
“The MPC unanimously decided to reduce the policy rate repo by 25 basis points, from 6.50 to 6.25 percent. The MPC unanimously decided to maintain a neutral stance, and remain focused on a sustainable alignment of inflation with target while supporting growth,” stated the RBI Governor.
The decision comes amid a slowdown in global growth and inflationary risk that continues to threaten economic stability.
The RBI has projected a 6.7% real GDP growth in FY26, while acknowledging global headwinds.
The stock markets reacted negatively, however, to the RBI’s policy repo rate cut. The BSE Sensex closed in the red by 0.25% and the Nifty 50 closed down by 0.18%.
Garima Kapoor is the Executive Vice President and Economist of Elara Capital. She attributes the market’s reaction to two factors.
First, traders were expecting additional liquidity measures. This included a reduction in the CRR, but this did not happen.
Second, the RBI’s decision to maintain neutrality, rather than provide a clear indication of an easing cycle created uncertainty regarding the timing of future rates cuts.
Investors are waiting for tangible signs that consumption will increase.
According to Business Today’s Kapoor, this is a short-term response. He notes that the RBI’s management of liquidity over the past fifteen days indicates a commitment to maintain sufficient liquidity in the systems.
Here are the sectors that could benefit:
Auto, banking and other rate-sensitive sectors to gain
The rate cut will likely boost sectors that are sensitive to rates, such as the banking, auto and real estate industries.
Experts believe that lower borrowing rates will spur credit demand and benefit the financial services and housing markets.
Anil Rego of Right Horizons, the fund manager and founder, said that non-banking finance companies (NBFCs), are well positioned to benefit from this move.
He said that “credit-sensitive sectors such as auto and real estate” will see a higher demand.
Vinit Bolinjkar is the Head of Research for Ventura Securities. He echoed these sentiments.
“The rate reduction, combined with recent liquidity-boosting actions, is expected drive fresh investments and kickstart the consumption cycle.” He said that sectors such as auto, FMCG and consumer durables, manufacturing and NBFCs will all benefit.
Market analysts also highlighted the fact that government initiatives, such as tax relief for middle-class families, combined with lower interest rates could boost consumption-driven growth.
Deepak Ramaraju Senior Fund Manager, Shriram AMC, says that themes such as discretionary spending and premiumisation are likely to outperform.
“Sectors such as automotive, real estate and discretionary segments like jewellery, durables and white goods may do relatively better.” Demand could also remain strong in travel and tourism, quick-service restaurants.
Banks with fixed rate portfolios will benefit
Not all lenders will benefit immediately from an increase in lending.
Naveen Kulkarni (Chief Investment Officer, Axis Securities PMS) pointed out that credit growth in banks has slowed down due to concerns about asset quality, especially in unsecured loans.
“The rate reduction is a positive move for lenders who have a larger share of fixed-rate loans, such as vehicle financiers and gold financiers. He explained that banks with a high proportion of floating rate loans could face margin pressures in the near term.
Kulkarni identified Bajaj Finance and Cholamandalam Investment & Finance as the key beneficiaries of rate cuts.
Sachin Sachdeva is the vice president and sector head of financial sector ratings for ICRA. He said that he expected the net interest margins to shrink by 15bps as a percentage of advances for banks. This will result in a drop of 0.80% for ROE.
Private banks are expected to have a higher impact than public banks, with 20bps and 0.85%, compared to 10bps & 0.76%.
He said that the impact on private banks will be greater because they have a higher share of EBLR compared to public sector lenders.
Bond market outlook improves with falling yields
The bond market has reacted positively to the rate reduction, with the benchmark 10-year bond yield falling by 20 basis points.
Falling interest rates made existing bonds more valuable and boosted demand for debt mutual fund and long-duration bond.
Divam Sharma (Co-Founder and Fund manager at Green Portfolio PMS) highlighted the potential benefits of debt market participants.
“With yields decreasing, debt mutual funds and bonds with long-term maturities become more attractive.” Lower borrowing costs can also help capital expenditures in sectors such as infrastructure and manufacturing. This would support the overall economic activity, he said.
Sonam Srivastava is the Founder and Fund Manager of Wright Research PMS. She noted that a declining interest rate environment will encourage capital inflows to debt instruments.
Crypto attracts investors looking for alternative assets
The rate cut has also led a renewed interest in alternative assets, such as cryptocurrency.
Sumit Gupta (Co-Founder of CoinDCX) stated that the RBI’s move signals a change towards stimulating economic activity, and fostering liquidity.
“From a capital market perspective, this rate decrease serves as a catalyst to increase investor confidence, creating an environment that is favourable for increased capital flows in various asset classes.” Gupta explained that in a scenario where high rates of interest often discourage investment in alternative assets the lowering of these rates encourages a quest for alternative growth avenues.
He said that as fixed deposits become less attractive, investors will be more likely to explore options such as crypto assets.
“With the advent FIU-compliant Exchanges, crypto offers a safe opportunity for portfolio diversification,” said he.
This post RBI reduces repo rate: Which sectors and stocks could be affected? This post may be updated as new information unfolds
