RBI Governor Sanjay Malhotra, in a welcome move, cut the repo rate by 50 bps (basis points) to 5.50% and the CRR rate by 100 bps to 3%, providing ample liquidity to the financial services system. The brilliant move will likely spur corporate activity and consumer spending.
At the same time, RBI is seeing lower inflation, and its forecasts are 3.7%, below its target range. With inflation below RBI’s target range of 4% plus or minus 2%, there is room for further rate cuts. The move to a neutral stance enables RBI to be data-dependent and cut rates by 25 bps or more in the coming months, as global tariff uncertainty weighs on economic growth. It is good to note, that interest rates are still above the 4.40% levels before the pandemic.
RBI also reduced the Cash Reserve Ratio (CRR) by 100 bps to 3%, freeing up liquidity for banks and releasing ₹2.5 trillion into the system to boost lending and economic growth.
This decisive action, driven by a prioritization of economic growth and moderating inflation, aims to stimulate economic activity. While the market anticipated RBI’s accommodative monetary stance, RBI’s proactive approach of cutting 50 bps boosts growth. Additionally, RBI maintained GDP growth at 6.5%.
Catalysts that improve India’s Equity Outlook
1. Interest rates are down by 100 bps in the last four months.
2. Inflation is at a six-year low of 3.2%.
3. Oil prices are down -23%.
4. RBI released ₹2.69 trillion of surplus to the government.
5. The fiscal deficit is healthy at 4.2%.
With the necessary conditions in place, we anticipate that companies and consumers will leverage these opportunities to expand their business activities.
Beneficiaries of RBI’s Significant Cut
Industrials: In the last four months, a cumulative 100 bps of interest rates has been cut, which would lower working capital and borrowing costs for Corporate India. This reduction in interest rates is particularly beneficial for power utilities in thermal and renewable energy and mining, as they will see a significant decrease in operational costs, thereby improving their profit margins.
Government infrastructure: Spending on roads and construction activity would benefit from lower working capital costs. It comes at an opportune time, ahead of the next budget. Infrastructure firms would begin to see an acceleration of 12-18% revenue growth.
Financials: The rate cut is an indication to spur growth via monetary tools. The rate cut will no doubt hit Net Interest Margins (NIMs) for banks and lenders with a higher proportion of floating assets and a lower proportion of fixed assets. However, the 50bps cut is larger than consensus expectations and could translate into higher loan growth for banks, which should help the book growth of most lenders. Real Estate is another expected beneficiary, given that most home loans are floating and should facilitate demand growth.
Consumer: EMIs on Housing loans have become cheaper, providing the consumer with higher disposable income and invigorating growth for automobiles and other durable goods. The demand for hotels and retail would benefit. Real Estate activity is bound to pick up with the easing of rates.
Overall, the 2-4% cut in profit growth at the aggregate level witnessed in the concluded quarter should find a bottom with the RBI’s 50 bps cut. Expect the upgrade cycle to begin in the next quarter or two, led by cyclical Industries, Financials, and Durables.
The author, Chakri Lokapriya, is the CIO Equities of LGT Wealth India.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making investment decisions.
