Repo rate cut sends 'strong' signal to markets on low borrowing costs ahead

RBI Policy: Given the current economic landscape, moderating inflation, and sluggish growth, another 25-50 bps rate cut within this calendar year remains a strong possibility

RBI Monetary Policy: The Reserve Bank of India (RBI) has cut the repo rate by 25 basis points to 6.25 per cent, a widely anticipated move. More than the rate cut itself, the focus now shifts to how the central bank navigates inflation control while supporting economic growth. The RBI’s stance has been gradually evolving—first shifting to a neutral policy in October 2024, then implementing a 50-bps cash reserve ratio (CRR) cut in December, followed by a Rs 60,000 crore liquidity infusion via open market operatipns (OMOs). 

 

Inflation concerns are easing, with consumer price index (CPI) inflation at 5.5 per cent and core inflation at 3.6 per cent as of December 2024. Projections indicate a further drop in CPI to 4.5 per cent-4.7 per cent by January 2025. Meanwhile, GDP growth for FY25 is estimated at 6.4 per cent—with expectations of 6.3 per cent-6.8 per cent growth in FY26. The combination of a rate cut and the tax-free income threshold rising to Rs 12 lakh could provide the much-needed push for consumption-led growth. 

 

 

On the debt market front, foreign investors have been increasingly buying into G-secs. FIIs have already pumped in over $2 billion, and inflows are expected to strengthen further post the rate cut. 

 

Meanwhile, in the equity markets, the rate cut serves as a strong signal that borrowing costs will decline, benefiting businesses dependent on credit. Lower interest rates are a boon for the banking and NBFC sector, as they reduce the cost of funds, making credit more affordable. This, in turn, stimulates demand for retail loans, housing finance, and corporate lending. 

 

NBFCs catering to auto, personal, and SME loans could see strong growth, benefiting from increased borrowing activity. The automobile sector is expected to gain as cheaper auto loans make vehicle fina New Delhi ncing more accessible. This is particularly beneficial for two-wheelers, entry-level cars, and commercial vehicles, where affordability plays a crucial role. With improved credit availability, demand could see an uptick in both urban and rural markets. The consumer durables and retail sectors are also poised for growth, as lower borrowing costs encourage consumers to spend more on home appliances, electronics, and high-value goods. 

 

The improved affordability of financing options is likely to boost sales and strengthen consumer sentiment, benefiting businesses in these segments. A revival in housing demand is on the horizon for the real estate and housing finance sector, as lower home loan rates make property purchases more attractive. The affordable and mid-segment housing markets are expected to see increased activity, while developers may fast-track new project launches to capitalise on improved buyer sentiment. 

 

The infrastructure and capital goods sectors are likely to benefit from cheaper credit, which makes large-scale projects more viable. This will support government-led infrastructure initiatives and encourage greater private-sector investment, driving expansion in the sector.

 

With the RBI initiating a rate-cut cycle, this 25 basis point reduction may just be the beginning. Given the current economic landscape, moderating inflation, and sluggish growth, another 25-50 bps rate cut within this calendar year remains a strong possibility. The central bank has demonstrated a clear intent to support economic expansion while keeping inflation in check. This pro-growth shift in monetary policy creates a favourable environment for rate-sensitive sectors, which are likely to outperform in the coming months. However, global economic trends, fiscal management, and inflation control will remain key factors shaping market sentiment and influencing the pace and timing of further rate cuts. 

 

(Disclaimer: Krishna Appala is a senior research analyst at Capitalmind Research. Views expressed are his own.)