Daily Voice: Liquidity won’t be an issue for money markets, low probability of further rate cuts by RBI, says Emkay Wealth's Joseph Thomas

Any further cut in interest rates has a very low probability for the rest of the Financial Year. This is because the current policy rate which is as low as 5.25 percent is quite close the estimated rate of retail inflation, and the optimal cost of capital, in an otherwise capital-scarce economy. We have retail inflation as low as 0.25 percent as per last CPI update. And as far as GDP growth is concerned it is as high as 8.20 percent for Q2FY 26.

While Iow inflation opens up quite a bit of space for rate cuts, the extremely bullish growth numbers do not leave much room for soft policy. Therefore, any further cut would be consequent to any fall in the rate of growth. The post-tariff, adverse external environment and its impact will be more visible in the Q3 numbers.

At the same time, the positive impact of the measures like the GST rationalization will also be reflected in the Q3 numbers. With inflation at multi-year lows, the rate of inflation could gradually move up. Given these factors at play, the probability for further rate cuts remains low at least till the end of this financial year.

Do you anticipate additional liquidity measures from the RBI going forward?

In the latest policy announcement the central bank has already announced liquidity measure through OMOs (Open Market Operations) and also the Dollar-Rupee swap. These actions confirm the fact the central bank is focused on smoothening money market conditions through appropriate liquidity measures. We can expect similar measures to continue till the close of FY26.

Liquidity is important even when adverse international environment threatens growth and stability. We should appreciate the fact these measures have been announced immediately after full implementation of the recent CRR cut by November 25. Liquidity will not be an issue going forward for the markets.

Do you think the central bank is unconcerned about the rupee’s depreciation?

The central bank will not be much concerned about a gradually depreciation of the Rupee. What central banks do not like is any speculative attack on the currency. Though the central may supply dollars to the market through currency intervention, the Rupee will be left to find its real value through the interplay of supply and demand factors. Trade does not support a strong Rupee but investment flows into the domestic market may support the Rupee as US rates move still lower.

Do you expect the rally in new-age technology stocks to continue in 2026, given the improvement in growth?

The new age technology would refer to the companies which are mainly into artificial intelligence and related architecture. If you look at NASDAQ the market has run up too high mainly based on valuations of a handful of companies whose business is around artificial intelligence and electronic chips etc. The P/E is close to 29-30 for the NASDAQ. Such high valuations usually invite sharp corrections, and one should be aware of this eventuality while investing.

Do you think this is the right time to begin gradual accumulation in the IT services space?

IT Services space offers good value, with a mix of both large cap and mid cap stocks, due to multiple factors. The most relevant factors is that the domestic companies weathered so many storms including Y2K, the US slowdown, the Great Recession etc. with the Rupee depreciation and the enhanced level of offshorization of business and diversification, in the light of AI etc.

The lot of IT Services companies is going to become richer. Finally, these companies have much higher flexibility in terms of their business positioning compared to IT product companies.

Apart from the likely rate cut, what do you expect from the Fed Chair’s commentary next week?

The Fed is fundamentally poised to reduce rates again. Even with a pause, the need to cut rates will be felt more as we get more and more data points. Last time around there was paucity of data arising from the government shutdown, and so there was very little live data points for the Fed and for the markets. This time there will be relatively more inferences that could be drawn from numbers.

Do you expect 2026 to be a much better year for equity markets compared to 2025?

Domestic equities have not given any returns to investors over the last one year or so. But there are signs of improvement if you look at the returns for 3 months and 6 months. The trend is that many are negative on the markets nowadays. Turnaround often happens when such negativity builds up beyond a limit.

Fundamentally, the economy is quite strong, but earnings have been a big let-down in the last six quarters. There we have probably seen the bottom and there may be revival. Low interest rates, plenty of liquidity, support for consumption through tax rationalization, the large amount of public capex are factors that would support good markets in future.

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