How markets will assess RBI MPC's decision: Six factors to watch for equity investors

RBI Monetary Policy Preview

The equity markets are pricing in a status quo by the central bank during the upcoming Monetary Policy Committee (MPC) review, however, the market sentiment could be influenced by Reserve Bank’s commentary on inflation, Rupee, system liquidity and growth outlook.

Here's a quick breakup of the aspects of the MPC that may influence equity market's reaction to the policy fineprint.

Policy Rate and Stance

What to Expect: Markets largely expect the repo rate to remain at 5.50%, in line with Moneycontrol’s poll of economists, treasury heads and fund managers, with most analysts anticipating a neutral stance. A note by Nuvama Research said the RBI may first evaluate the impact of GST rationalisation on consumption before considering a rate cut, while JM Financial said the MPC’s commentary will be critical, regardless of whether it maintains the current stance or signals future easing. In a contrarian view, Barclays said after a pause in August, the RBI MPC could cut policy repo rate by 25 bps. “Our base case for an October cut is premised on comfort over inflation, which allows further monetary easing. The recent tightening of financial conditions and the tariff overhang clouding the growth outlook in the 12-month ahead period are also reasons for a forward-looking central bank to cut rates. The tightening of financial conditions is also hindering transmission of policy easing to financial markets and bank lending rates,” the report said.

Why it Matters: The policy stability conveys the RBI’s balancing act between inflation control and growth objectives, thus anchoring investor expectations and reducing market volatility. However, any changes in policy rate will have an impact on the bond and equity market.

Inflation Outlook

What to Expect: The GST rationalisation is expected to ease headline inflation, with FY26 CPI projected to fall below 3%. Experts see this leading to a downward revision of inflation forecasts for upcoming quarters. Nuvama has cautioned that slower government spend and tariff headwinds could offset some benefits of lower inflation, and JM Financial said that the GST rationalisation reduces CPI liabilities, but the inflation trajectory remains upward-sloping, tgus making RBI’s tone during the policy important.

Why it Matters: Inflation expectations guide monetary policy and affect real interest rates, influencing consumption, corporate profitability, and equity valuations.

Currency Management

What to Expect: The rupee has been under pressure, hovering near record lows amid tariff worries and H-1B visa fee concerns. Sunny Agarwal, Head of Fundamental Equity Research at SBI Securities said if the currency is near record lows, RBI’s decision to intervene or allow market forces could significantly influence the forex market sentiment. Nuvama said that ongoing capital outflows could lead the RBI to prioritise currency stability over easing rates, while JM Financial said the central bank’s recent interventions to support the rupee demonstrate the importance of stabilising markets.

Why it Matters: Currency volatility impacts import costs, corporate margins, and FII flows, while a stable rupee reduces uncertainty for exporters, importers and investors.

Forward Guidance on Rates

What to Expect: Investors will closely follow the MPC commentary on the medium-term policy trajectory. SBI Securities’ Sunny Agarwal said that although inflation is largely under control, the weakening currency could act as a headwind against rate cuts, making RBI’s guidance crucial. Nuvama said it expects eventual monetary easing, though the timing remains key, and JM Financial believes a dovish tone is necessary to ensure effective transmission of earlier policy measures through the bond market route.

Why it Matters: Forward guidance helps markets anticipate policy shifts, influencing yield curves, credit flows, and sector rotations, while reducing uncertainty and enhancing policy effectiveness.

Market Impact and Liquidity

What to Expect: While a rate cut is unlikely, immediate equity movements are expected to be muted. In SBI Securities’ view, recent rate cuts and liquidity support have already helped with incremental credit growth, making this MPC largely a non-event for equity markets. JM Financial said the call rates remain within the policy corridor, while government securities yields have hardened slightly, reflecting limited transmission of earlier cuts.

Why it Matters: Adequate liquidity in banking system ensures better transmission of previous rate cuts and supports investment and consumption, while muted volatility preserves investor confidence in rate-sensitive sectors.

Sectoral and Flow Impact

What to Expect: If the policy stays unchanged, certain sectors may see market interest. SBI Securities said the auto sales numbers for September and commentary from auto majors post-Navratri will be closely watched, while PSU banks may benefit if lower inflation eases bond yields, thus boosting treasury gains. Metals, on the other hand, are largely influenced by global commodity trends rather than domestic policy. SBI Securities’ Sunny Agarwal said the MPC is unlikely to act before transmission of earlier cuts, given the fluid global geopolitical situation, indicating a wait-and-watch on October 1.

Why it Matters: Sectoral sensitivity to policy, liquidity, and global trends determines allocation strategies. Understanding which segments may react helps investors manage risk and identify opportunities.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.