Five things equity investors should look out for in the RBI Monetary Policy today

Rate sensitive stocks trading mixed after the RBI left the key repo rate unchanged.

Equity markets are unlikely to be moved by the RBI MPC announcement slated for April 5, as there is very little possibility of any surprise either on rates or on the monetary policy stance, market experts Moneycontrol spoke to said. Stock prices will continue to be driven by earnings expectations as we head into the quarterly results season, apart from global cues and news on the political front ahead of upcoming elections. Here are the five main points the equity markets will be watching out for:

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1)      Repo rate and policy stance

Why this is important: The repo rate is essentially the rate at which the RBI lends money to financial institutions and helps in making credit available and more affordable. Lower rates are always cheered by stock markets because it makes credit cheaper, and means companies and individuals can borrow more which invariably spurs growth.

What’s the expectation: Analysts mostly expect the status quo to continue on the repo rate from the current 6.5 percent. The last time the RBI announced a change in the repo rate was February 2023. Besides, experts say the central bank could keep its monetary policy stance also unchanged. Monetary policy stance is a signaling mechanism used by the central banks to indicate which way the central bank is leaning – their bias, based on various considerations like inflation, economic growth, external factors, etc. According to Deepak Agrawal, CIO-Fixed Income, Kotak AMC, “Strong growth in FY24 and growth projections for the current fiscal give the RBI leeway to wait for actual monetary easing in advanced economies before effecting cuts here. With one-year forward real rates upwards of 2 percent (based on the FY25 inflation forecast) there is a case to change the monetary policy stance to “neutral” but RBI may keep rates unchanged and continue with its “withdrawal of accommodation” stance," he said.

2)      Inflation expectations

Why is this important: High inflation increases the cost of living and is particularly important to keep under check ahead of elections next month. Besides, lower inflation will give the central bank leeway to cut rates, which will propel growth.

What’s the expectation: Although it is under the RBI's tolerable band of 4-6 percent, India's inflation is still at the higher end of the band. India's consumer price index (CPI)-based inflation eased to 5.09 percent in February 2024 from 5.10 percent in January 2024 even though RBI's target is 4 percent. In the last MPC meeting, the RBI highlighted that the policy must continue to be actively disinflationary. “Going forward, the inflation trajectory would be shaped by the evolving food inflation outlook,” RBI had said during the last meeting.

This time around, concerns around food prices also stem from the fact that the IMD has warned of an intense heat wave between April and June, which might impact food prices. Besides, Apurva Sheth, Head of Market Perspectives and Research, SAMCO Securities, said, "The rural inflation rate, at 5.93 percent, is almost 50 basis points higher compared to urban inflation. This higher rate poses a bigger challenge for the central bank as it is a major roadblock in reviving rural demand.”

3)      Growth projection

Why is this important: RBI has to always maintain a balance between growth and inflation. Currently, the economy seems to be on a strong growth trajectory, but private investments have been lagging. The central bank's projections will give some sense of confidence to the market in terms of the overall environment for growth which will have a bearing on corporate earnings.

Also read: RBI MPC to keep repo rate unchanged in April meeting, says CareEdge report

What’s the expectation: In its February 2024 meeting, the RBI projected around 7 percent GDP growth for FY24-25, up from the previous projection of 6.6%. According to Devang Shah, co-head of Fixed Income at Axis Mutual Fund, the general expectation is that they might be slightly more bullish on the growth aspect, where there could be some “upward revisions” on the growth side.

4)      Banking liquidity

Why is this important: Theoretically, when the growth in total money supply in the financial system overshoots the GDP growth, that excess money gets deployed in assets, for example, equity markets. This causes asset prices to rise. However, in the short run, banking liquidity does not have any impact on equity markets. For debt markets, it might mean rising short-term rates.

What’s the expectation: In the February 8 meeting, RBI said that after remaining in surplus during April-August 2023, system-level liquidity turned into a deficit from September after a gap of four and a half years but adjusted for government cash balances, potential liquidity in the banking system was still in surplus. “RBI remains nimble and flexible in its liquidity management…We will deploy an appropriate mix of instruments to modulate both frictional and durable liquidity…,” RBI Governor Shaktikanta Das had said at that time. According to Anurag Mittal, Head of Fixed Income, UTI AMC, liquidity has already seen some improvements as overnight rates are close to the policy rate because of government spending. Hence, he doesn’t really expect any major liquidity measures.

Other comments: RBI has been tightening the screws when it comes to money flowing into capital markets. Besides, it has also been concerned about the rise in unsecured lending. Commentaries on these aspects will be keenly watched by stock market investors.

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