RBI’s Major Rate Cut and Liquidity Injection: Experts Predict Possible Pause Ahead
RBI Surprises Markets with Aggressive Rate Cuts
The Reserve Bank of India (RBI) has caught market analysts off guard with a significant reduction in the repo rate by 50 basis points (bps) and a 100 bps cut in the Cash Reserve Ratio (CRR). This unexpected move comes as the central bank recognizes easing inflation rates and a slower-than-forecasted economic growth trajectory. Many market observers anticipated a more moderate cut of 25 bps.
Suvodeep Rakshit, Chief Economist at Kotak Institutional Equities, commented, “The RBI’s actions were surprising on three counts: a 50 bps repo rate decrease, a substantial 100 bps CRR reduction, and a shift in policy stance back to neutral. These changes effectively bring a halt to the ongoing rate reduction cycle.”
Change in Policy Stance Signals Shift
In a related note, Sujan Hajra, Chief Economist at Anand Rathi Group, remarked, “The shift from an ‘accommodative’ to a ‘neutral’ policy stance may hint at the conclusion of the rate cut cycle. However, it primarily serves to curb any potential ‘irrational exuberance’ in financial markets.”
Research Head Gautam Duggad from Motilal Oswal Financial Services added that the unforeseen decrease in the repo rate reflects widespread moderation in inflation and disappointing GDP growth metrics. April marked a significant sixth consecutive month of declining food inflation, aided by an abundant wheat harvest and a favorable monsoon forecast, which are expected to alleviate price pressures.
Experts Anticipate Additional Rate Cuts
Despite the current cuts, a consensus among analysts indicates there is still potential for further easing should the economic environment remain conducive. “A favorable inflation outlook coupled with the ongoing challenges in economic growth creates room for additional rate reductions,” noted Duggad, predicting two more cuts of 25 bps each in FY26.
Positive Implications for Various Sectors
The recent policy adjustments are viewed favorably by the markets, particularly benefiting sectors sensitive to interest rates. Analysts assert that reduced borrowing costs will favor non-banking financial companies (NBFCs), real estate, and automotive industries. Duggad emphasized, “From an equities standpoint, this is advantageous for NBFCs, real estate, and the auto sectors.”
With real interest rates maintained at 1.8 percent, experts assert that the RBI retains the capacity for additional policy easing if inflation is kept in check and economic growth doesn’t accelerate significantly.
Market Reactions and Future Considerations
Regarding the effects on debt markets, Rajeev Radhakrishnan, CIO of Fixed Income at SBI Mutual Fund, remarked, “The Monetary Policy Committee’s bold measures, including the substantial 100 bps CRR adjustment alongside the 50 bps repo cut, highlight a proactive approach to stimulate growth, considering the inherent delays in policy impact. However, the transition to a neutral stance indicates that policy rates might stabilize around 5.50 percent during this cycle. Future data will inevitably influence this trajectory.”
Impact on Banking Sector
Speculating on how these rate cuts will affect banks, Anand Rathi Group’s Hajra noted that the reductions may initially pressure net interest margins but could be alleviated by the liquidity boost. “Sectors sensitive to interest rates stand to gain. While the reduction in rates could impact short-term margins for banks, the significant CRR cut provides a substantial counterbalance, making this a net positive development for financial institutions.”
