RBI MPC slashes repo rate after 5 years. Is another cut likely this year? Experts answer

RBI monetary policy: The Reserve Bank of India (RBI) announced a 25-basis-point reduction in the repo rate, bringing it down to 6.25 per cent from 6.5 per cent. This marked the first rate cut in nearly five years, with the last reduction occurring in May 2020 when the repo rate was slashed to 4 per cent. The central bank also maintained a 'neutral' stance on monetary policy.

This decision was made during the first Monetary Policy Committee (MPC) meeting under the leadership of RBI Governor Sanjay Malhotra, who assumed office in mid-December. Malhotra stated that the committee had unanimously agreed to lower the repo rate and maintain its neutral stance, emphasising a commitment to aligning inflation with targets while supporting economic growth.

For the fiscal year ending March 31, RBI quoted the government estimate to put the growth rate at 6.4 per cent, its worst in four years and lower than the 6.6 per cent seen previously, while the inflation was pegged at 4.8 per cent.

The rate cut failed to cheer the stock market investors, sparking volatility in indices. BSE Sensex gyrated over 600 points following the 25 basis points rate cut, touching the day's high of 78,356.98 and a low of 77,730.37. At noon, the index was trading 150 points or 0.19% lower at 77,918.08. Its NSE counterpart Nifty 50 was also in the red, trading 0.14% or 32 points down at 23,571.15.

Expert Reactions

Here's how experts analysed RBI Governor Sanjay Malhotra's first policy decision, its impact on the market and sectors, and possible rate cut trajectory going ahead:

Rate cut impact on demand and economy

Analysts believe after the tax cut bazooka by Finance Minister Nirmala Sitharaman in Budget 2025, the RBI Governor has followed suit in his bid to revive the slowing economy.

"The proposed measures are expected to enhance the money supply within the economy, improve liquidity, promote borrowing, and stimulate consumer demand. The anticipated action is likely to lower borrowing expenses, which may enhance credit accessibility and stimulate demand across various sectors," said Palka Arora Chopra. Director, Master Capital Services.

Divam Sharma- Co-Founder and Fund Manager at Green Portfolio PMS, reiterated this view, saying this move is designed to boost economic growth by making borrowing cheaper, which is great for businesses looking to expand. This he said will have a positive spillover on the stock markets as well.

Which sectors can gain from RBI rate cut?

While the market was anticipating the rate cut and the Governor delivered as per expectations, it failed to cheer the market. That’s mostly because worries about global trade, fiscal challenges, and whether this cut will actually boost growth are keeping the excitement in check, opined Sharma.

However, analysts are hopeful that the rate cut along with liquidity measures will usher in fresh investments and kick start the consumption cycle, which will benefit sectors like banking, auto, FMCG, consumer durables, manufacturing, and NBFCs.

Sonam Srivastava, Founder and Fund Manager at Wright Research PMS, said, "This rate cut is expected to have a positive impact on rate-sensitive sectors. Banking and financial stocks may see increased credit demand, improving net interest margins in the near term. The real estate sector stands to benefit as lower interest rates on home loans could boost housing demand. Similarly, consumer durables and auto segments may experience higher sales, particularly in the premium category, as financing costs decline."

Meanwhile, Naveen Kulkarni, Chief Investment Officer, Axis Securities PMS expects the rate cut to be a positive for lenders having a higher share of fixed rate portfolio, especially credit card issuers, vehicle financiers and gold financiers. On the other hand, banks with a higher share of floating-rate loans would continue to face near-term headwinds on margins, he added.

Are more rate cuts in the offing?

With growth projection for FY25 revised lower and expectations that consumer price inflation will progressively align towards the inflation target of around 4 per cent in FY26, analysts believe this creates a space for rate cuts in the coming few quarters.

Radhika Rao, Executive Director and Senior Economist, DBS Bank said the rate cut was driven by concerns over economic growth, while seasonal declines in food prices were expected to mitigate inflation risks. Given the GDP forecast of below 7 per cent for the current and next fiscal years, Rao expects another 25-basis-point rate cut in April.

"The GDP growth for FY25 has been revised downwards to 6.4% vs 6.6% previously. For FY26, GDP growth is expected to hold up at 6.7%. Inflation estimates for FY26 are expected to be closer to the regulator’s tolerance limit. We could expect another rate cut of 25bps in the upcoming meetings," noted Kulkarni of Axis Securities PMS.

However, Apurva Sheth, Head of Market Perspectives & Research, SAMCO Securities cautioned that future rate cuts would depend heavily on the U.S. Federal Reserve's policies and their impact on global inflation. Additionally, Sheth emphasised the RBI's need to support the rupee, which is at an all-time low, potentially limiting the scope for further rate reductions.

His views were echoed by Suresh Darak, Founder, Bondbazaar who also doesn't anticipate a rate cut in the next meeting.

Disclaimer: The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.