CRR cut surprised mkts; RBI may await data before next rate move: Analysts

The cut in cash reserve ratio (CRR) by 100 basis points to 3 per cent that is likely to infuse ₹2.5 trillion in the system came as a surprise than the 50 basis points (bps) reduction in repo rate, said market analysts, who expect the Reserve Bank of India (RBI) to remain data-driven before cutting rates again.

 

The RBI's monetary policy committee (MPC), led by Governor Sanjay Malhotra, slashed repo rate by 50bp to 5.50 per cent, besides cutting the CRR. The central bank changed its monetary policy stance to “neutral” from accommodative, with the governor saying further action will depend on incoming data. 

 

 

The CRR cut is more significant than the repo rate cut, given what it would mean for liquidity in the system, Jyotivardhan Jaipuria, founder and managing director at Valentis Advisors, noted.

 

“The RBI may take a breather for now and become data-dependent before cutting rates again, as they may want to see the impact of cuts done till now. With the next policy review two months away, the focus will be on how the monsoon unfolds and its effect on inflation, GDP growth along with developments in the global tariff landscape,” he added.

 

At the bourses, the S&P BSE Sensex gained over 800 points in intra-day deals to 82,200 levels. The Nifty 50, on the other hand, surged over 200 points and tested the 25,000 mark during the day. Interest rate sensitive stocks – auto, banks and realty – were among the key gainers.

 

The policy, according to U R Bhat, co-founder & director, Alphaniti Fintech shows the RBI’s confidence in inflation and other macro variables. "The policy (the big cut of 50 bps) signals an end to the rate cut cycle, at least for now. The policy is a valiant effort to spur demand, both rural and urban. That said, demand revival has more dynamics than just a rate cut,” Bhat said.

 

Market impact

 

RBI’s decision, though positive for growth, is slightly negative from the market perspective for the near-term, according to VK Vijayakumar, chief investment strategist at Geojit Investments. This big rate cut, he believes, will impact the margins of the banks and, therefore, bank stocks will be under pressure in the near-term. 

 

“The change in monetary stance from accommodative to neutral also indicates that more rate cuts are unlikely unless the situation warrants," Vijayakumar added. 

 

If the macros back home remain under check in the backdrop of a normal monsoon and no adverse global cues, G Chokkalingam, founder and head of research at Equinomics Research expects the markets to move up around 10 per cent from the current levels.

 

Case for aggressive cuts

 

Rate-cut cycles generally last 6 to 8 quarters, and we’re midway through, said Deven Choksey, managing director at DRChoksey FinServ. He expects another 100–125 bp of rate cuts over the next three to five quarters, which could boost growth and drive investor interest in equities, especially rate-sensitive sectors. "With growth gaining momentum and interest rates staying low, markets are well-positioned for an upward move." 

 

The RBI’s latest move aligns with India’s infrastructure push and rising credit demand, Choksey said. With inflation under control, especially from imports, the environment supports lower interest rates to aid growth, he added.

 

Chokkalingam expects another 100bp rate cut by the end of this fiscal or even within the calendar year. With exports under pressure, he sees rate cuts as key to boosting domestic demand and supporting GDP growth.