Sensex and Nifty outlook; What if RBI does not cut repo rate?

Indian equity markets are bracing for the Reserve Bank of India’s (RBI) monetary policy announcement tomorrow, with investors hoping for a liquidity boost, if not a rate cut. Market participants are closely watching RBI Governor Shaktikanta Das and the Monetary Policy Committee (MPC) to see if they will cut the repo rate or the cash reserve ratio (CRR), amid signs of an economic slowdown.

The majority of economists surveyed by Bloomberg and Moneycontrol expect the RBI to keep the repo rate unchanged at 6.5 percent, citing persistently high inflation and the neutral stance adopted in the October meeting. However, some experts anticipate a 50 basis point CRR cut, which could inject Rs 1-1.25 lakh crore into the banking system, boosting credit growth and investments.

Recent data showing a sharp slowdown in GDP growth to 5.4 percent for Q2 2024 has raised concerns about the impact of restrictive monetary policies on the economy. This has heightened expectations for measures to enhance liquidity.

If the RBI does not deliver an outright rate cut, markets will focus on the possibility of a CRR reduction, which could provide the liquidity boost they are hoping for. According to Kranthi Bathini, Director of Equity Strategy at WealthMills Securities, "Though the rate cut cycle has begun in the US, India may also ease rates soon, possibly in the second half of 2024, benefiting interest-rate-sensitive sectors."

Despite uncertainty over the RBI’s decision, the Indian markets have shown resilience. The BSE Sensex surged over 800 points to 81,765, and the NSE Nifty gained over 240 points to end above 24,700 on Thursday, buoyed by optimism from global markets and strong foreign institutional investor (FII) inflows.

Should the RBI fail to meet liquidity expectations, experts warn of a potential knee-jerk reaction, especially in the banking sector, which could lead to profit booking. Kunal Rambhia, Fund Manager at The Streets, suggested that indices might face limited risk-reward at these elevated levels, advising a stock-specific approach.

In conclusion, the market’s reaction will largely depend on whether Governor Das signals an imminent easing cycle or maintains a cautious stance to address inflationary concerns. Even without a repo rate cut, a CRR reduction could still offer the liquidity boost that investors are hoping for.