The Reserve Bank of India (RBI) surprised markets by delivering a sharp 50 basis points (bps) repo rate cut, citing easing inflation and slower-than-anticipated economic growth. Market participants had largely expected a 25 bps cut.
Suvodeep Rakshit, Chief Economist at Kotak Institutional Equities, said, “The RBI surprised on three fronts: with a 50 bps cut, a CRR cut of 100 bps, and a shift in policy stance back to neutral. This effectively puts a pause on the rate cut cycle.”
Sujan Hajra, Chief Economist at Anand Rathi Group, noted, “The policy stance has been shifted from ‘accommodative’ to ‘neutral’. Although this change might be seen as a signal that the rate cut cycle is nearing its end, we believe it is aimed at tempering any potential ‘irrational exuberance’ in the financial markets.”
Gautam Duggad, Head of Research, Institutional Equities, at Motilal Oswal Financial Services, added, “The surprise 50 bps rate cut comes on the back of broad-based moderation in inflation and slower-than-expected real GDP growth.”
April marked the sixth consecutive month of declining food inflation. A record wheat output and a normal monsoon forecast are expected to keep price pressures under control.
Two more rate cuts expected: Motilal Oswal
However, most experts believe there is still room for further easing if conditions remain supportive. “A benign inflation outlook and a challenging growth environment provide scope for more rate cuts,” added Motilal Oswal’s Duggad. “We expect two more rate cuts of 25 bps each in FY26.”
The policy decision is seen as a positive for the markets, especially for interest rate-sensitive sectors. Analysts say NBFCs, real estate, and auto companies stand to gain from lower borrowing costs. “From an equities perspective, this clearly augurs well for NBFCs, real estate, and auto sectors at the margin,” Duggad added.
With the RBI keeping real interest rates at 1.8 per cent, experts believe the central bank still has room for more easing if inflation remains under control and growth does not pick up.
Neutral stance hints at pause ahead: SBI MF
Commenting on the impact on debt markets, Rajeev Radhakrishnan, CIO – Fixed Income, SBI Mutual Fund, said, “The MPC has clearly surprised markets with a big bang set of measures, including a 100 bps CRR cut and a 50 bps repo cut. These clearly reflect a frontloading approach to support growth, considering the lag effects of policy transmission. At the same time, the shift in stance to neutral suggests that policy rates may level off at 5.50 per cent in the current cycle. However, this will remain a moving target, with future data points likely to shape the outcome.”
Rate cut may hit bank profits, but liquidity boost helps: Anand Rathi Group
Speaking specifically on the impact of the rate cut in banks, Anand Rathi Group’s Hajra noted that it could weigh on net interest margins in the short term, but the liquidity boost may help, “Interest-sensitive sectors are poised to benefit. While lower rates and policy transmission could have impacted bank net interest margins in the near term, the sizable CRR cut provides a significant offset, making this a particularly positive move for banks.”.