RBI’s Rate Cut Unlikely To Buoy Bourses

While MPC is expected to take cognizance of the recent rupee depreciation and the resultant risk of imported inflation in the medium term, the comfort on the near-term trajectory of inflation and the need for giving further push to growth supportive measures announced in the budget, is expected to weigh on the decision making on rate action - Mandar Pitale, Head (Treasury), SBM Bank India, tells Bizz Buzz

Mumbai: Even as the Reserve Bank of India may go for a rate-cut by 25 basis points (bps) post Monetary Policy Committee (MPC) meeting, the move is unlikely to buoy stock markets as bourses have already factored it in. The three-day RBI February Monetary Policy review meeting, which began on Wednesday, is taking place in the backdrop of the central government delivering growth supportive budget with fiscal prudence. Conservative fiscal projections are instrumental in providing the necessary space for monetary easing.

At the same time, the fiscal impulses provided in the budget are growth supportive in medium term and thus will provide comfort to MPC in focusing on ‘inflation centric’ policy measures, says experts

Talking to Bizz Buzz, Mandar Pitale, Head (Treasury), SBM Bank India, said: “While MPC is expected to take cognizance of the recent bouts of rupee depreciation and the resultant risk of imported inflation in the medium term, the comfort on the near-term trajectory of inflation and the need for giving further push to growth supportive measures announced in the budget, is expected to weigh on the decision making on rate action.”

Taking all these factors into consideration, it would be prudent to start the rate easing cycle in MPC meeting with 25 bps cut and retaining a neutral stance with a commitment to maintaining adequate durable systemic liquidity necessary for credit pick up, he said.

Even if the rate-cut happens, one doesn’t expect much movement in the market.

Suresh Darak, founder, Bondbazaar, said: “We expect the RBI to cut the benchmark rate by 25 basis points in the upcoming policy, given the government’s commitment to fiscal prudence. However, this move is largely priced in, so we don’t anticipate significant market movement.”

The real focus will be on the RBI’s future guidance, particularly their strategy for managing liquidity amidst currency depreciation. The RBI’s outlook on liquidity and currency will be crucial in shaping market sentiment, he added.

While a conventional 25 bps rate cut in the upcoming MPC policy is less of a market debate, the actions around ‘what beyond a cut’ will be more watched, says Madhavi Arora, chief economist, Emkay.

Easing by stealth via unconventional policy tools like liquidity and regulatory measures will continue. The RBI may also address the stress in the non-sovereign money market.

“We expect another round of Rs300-billion OMOs (open market operations), implying over Rs900 billion in total in FY25E. A CRR cut is a close call, but a temporary cut may not address the underlying banking stress. Easing in ensuing tighter LCR norms (Apr-25 onwards) and lending standards might be a preferred policy tool. We will also watch for additional capital account easing actions via the FCNR route,” said another expert.