After Five Years, RBI MPC Cuts Repo Rate: Governor Malhotra Aims to Stimulate Economic Growth

Sanjay Malhotra, the governor of the Reserve Bank of India (RBI), has revealed that the Monetary Policy Committee (MPC) has decided to reduce the benchmark repo rate by 25 basis points. The MPC commenced its three-day meeting on February 5, 2025, to discuss and establish new interest rates. This meeting marks the first under Malhotra’s leadership, who took over in December 2024 after Shaktikanta Das’s term ended.

A reduction of 25 basis points in the repo rate is anticipated to enhance liquidity in the market, lowering the benchmark lending rate from 6.5% to 6.25%.

An official noted, “The consensus is definitely expecting the RBI to start with a rate cut and then further provide a medium-term trajectory about the pace of rate cuts and how the RBI will manage liquidity. This is crucial for reviving overall economic growth and handling the USD-INR equation.”

RBI MPC on growth projections:

The RBI’s Monetary Policy Committee (MPC) has estimated India’s GDP growth for the fiscal year 2025-26 at approximately 6.7%, as announced by Governor Malhotra. 

In the last meeting held in December, the previous RBI Governor, Shaktikanta Das, had projected India’s growth for the current fiscal year at 6.6%. 

The RBI anticipates economic growth rates for the next fiscal year, starting on April 1, to be 6.7% in the first quarter, 7% in the second quarter, 6.5% in the third quarter, and 6.5% in the fourth quarter. 

During the December 2024 meeting, the monetary policy lowered the growth forecast for Q3 FY25 from 7.4% to 6.8%, adjusted the Q4 growth target from 7.4% to 7.2%, and revised the Q1 FY26 estimate from 7.3% to 6.9%. 

The governor noted that global challenges continue to affect the outlook and present downward risks.

Inflation outlook for FY26:

The Governor mentioned that inflation has decreased, aided by a positive outlook on food prices, and is expected to ease in FY26, providing additional relief to Indian families. 

The RBI predicts inflation to be at 4.2% for the fiscal year 2025-26. For the four quarters of FY26, the MPC has projected inflation rates of 4.5% for Q1, 4% for Q2, 3.8% for Q3, and 4.2% for Q4, with risks evenly balanced.

The Benefits:

With the recent liquidity boost from the Reserve Bank of India (RBI) and growing optimism in the markets, a decision by the RBI to lower interest rates could lead to a positive sentiment across various sectors.

Financials and Non-Banking Financial Companies (NBFCs):

Solanki indicates that financial institutions and non-banking financial companies (NBFCs) will be directly influenced as liquidity conditions improve. With access to cheaper credit, small finance banks, which often have a higher rate of unsecured lending, are expected to experience increased demand. Conversely, large private banks are likely to remain stable and will focus on enhancing their balance sheet quality. According to Sneha Poddar from Motilal Oswal Financial Services, companies with a larger fixed-rate portfolio will feel a more significant impact, with Bajaj Finance and Shriram Finance being among those that could benefit the most.

Auto:

Another official stated, “The auto sector will be among the first to gain, with two-wheelers leading the way, followed by affordable car manufacturers like Maruti.” Lower loan rates are expected to stimulate consumer spending in both rural and urban areas, potentially boosting two-wheeler stocks like Hero Motocorp and TVS Motors.

Consumption and Durables:

With the RBI boosting liquidity and encouraging consumer spending, companies in the consumption sector are likely to see benefits. He also said, “Consumption has been lagging for the past two quarters, especially in urban areas. Companies catering to urban consumption should see some action.” Sectors such as consumer durables, including firms like Voltas and Havells, are expected to gain traction as financing costs decrease, leading to increased sales of household goods.

Real Estate:

He further stated, “Interest rate cuts will spur activity in the affordable and mid-range housing segments, as lower EMIs make home purchases more attractive.” The real estate sector, which has maintained strong demand despite rising prices, is poised to gain additional momentum from cheaper home loans.

The Other Side:

However, there are concerns as well.  Another official noted, “Post the budget and with the new government taking over, the market has priced in a possible RBI stance change. We’ve seen markets recover from their lows, but as we approach the announcement, there’s visible nervousness. The market is hedging its bets.” This indicates a level of uncertainty as investors prepare for potential shifts in monetary policy.

If the rate cut does not materialize, it could lead to a short-term negative impact on market sentiment, resulting in some level of correction. An official said, “The market has already factored in the possibility of a rate cut and is expecting a dovish stance from the RBI. If this expectation is not met, profit booking may be triggered, especially in mid-cap and small-cap stocks.”

An official echoes this sentiment, stating that a failure to meet rate cut expectations could prompt a broad correction across various sectors. He highlights that “NBFCs, large banks, and real estate firms could all be affected.” The psychological impact on consumers and industries would be substantial, as uncertainty surrounding monetary policy could lead to hesitance in borrowing and spending. If rate cuts are postponed, potential buyers waiting for improved loan conditions might reconsider their investment strategies.

Additionally, bond yields will be an important consideration. Should the rate cut not occur, bond yields may rise again, negatively impacting bond prices and, consequently, larger banks. Chouhan emphasizes that the market is not just seeking confirmation of the rate cut but also guidance from the RBI governor regarding future policy outlooks. “The Governor’s commentary will play a crucial role in shaping market confidence,” he adds.

Disclaimer : 

The information provided is sourced from Money Control and is intended for informational purposes only. It should not be construed as financial advice. Always conduct your own research or consult with a financial advisor before making any investment decisions.