Favorable time to pick rate-sensitive stocks as analysts bet on RBI easing

India's rate-sensitive stocks will be in focus going ahead as analysts grow optimistic about these counters, citing a drop in valuations and the potential for further monetary policy easing by the Reserve Bank of India (RBI) amid lower inflation.

 

Stocks in these rate-sensitive sectors — auto, financials, consumer goods and realty — could see a potential rally amidst the $1.3 trillion rout in the Indian markets as a rate cut could mean relief for companies operating in this space.

 

Lower interest rates, for instance, reduces borrowing costs, which boosts demand for loans and improves profitability for banks and non-banking financial companies (NBFCs). Similarly, the auto, real estate, and consumer durables sectors benefit from increased consumer affordability due to lower loan rates.

 

 

"With the Reserve Bank of India expected to cut rates in the April meeting as well, it is a favourable time for investors to consider buying rate-sensitive stocks," said Vinod Nair, head of research at Geojit Financial Services. An interest rate-sensitive stock is a stock that is especially influenced by changes in interest rates.

 

Case for easing

 

India's headline consumer price index (CPI)-inflation eased to 3.61 per cent in February 2025, the lowest since July 2024, on the back of a sharp decline in food inflation, mostly due to lower vegetable prices. In January, headline inflation stood at 4.3 per cent.

 

With retail inflation expected to hover around the 4-per cent level in the short term, at a time when economic growth remains in a slow lane, analysts expect another 25-basis point cut in the upcoming Monetary Policy Committee (MPC) April meeting.

 

"The below potential growth in the recent quarters and comfort on the inflation front support the possibility of a 25-bps policy rate cut in the upcoming April MPC meeting," according to Rajani Sinha, chief economist at CareEdge Ratings. 

 

Notably, the RBI's MPC delivered its first repo rate cut in five years in February 2025, lowering the interest rates by 25 basis points. The central bank further announced liquidity measures to shore up liquidity in the system. The next MPC meeting is scheduled from 7 to 9 April 2025. 

 

With a more benign inflation environment, Julius Baer India, too, expects a follow-through 25 bps rate cut in April policy. "However, we expect the rate cut cycle in India to be shallow (total 50-75 bps), as the Indian economy continues to be on a relatively strong footing," Unmesh Kulkarni, managing director and senior advisor at Julius Baer, said.

 

Given the evolving growth-inflation dynamics in the economy, Ruchit Jain, head of technical research at Motilal Oswal suggests investors cherry-pick rate-sensitive stocks in the current scenario. 

 

Investment Strategy

 

On the bourses, the Nifty and Sensex indices have crashed around 14 per cent from their record highs, while the Nifty Bank is down 11 per cent. The Nifty Auto, and Realty indices, too, are down 25 per cent and 31 per cent, respectively, from their respective highs.

 

The sharp drop has eased the valuations of the benchmark Nifty 50, which trades at a price-to-earnings (P/E ratio) of 18.8 times, down from its peak of 23.8 times in September last year.

 

The Nifty Auto and Nifty FMCG indices' PE, too, have fallen to 20 times and 36.9 times, respectively, from their peak of 29 times and 47 times. The realty gauge was seen quoting at 31 times against its peak of 68 times. Meanwhile, the Nifty Bank trades at 1.9 times price to book (P/B ratio), down from their peak of 2.2 times.

 

"Certain sectors, like banking, have valuations near one standard deviation of its long-term valuation, making them particularly attractive for investors. Further, these sectors have not factored in the likely improvement in outlook in FY26, led by an increase in disposable income from the tax rate and recovery in rural and urban spending; thus, making them attractive at current levels," Vinod Nair of Geojit Financial said.