MPC impact on stock markets: Key takeaways on rates, growth, risks

Typically, rate-sensitive stocks—such as banks, real estate, autos and consumer durables—stand to benefit from a rate cut. However, today’s market reaction was muted.

The stock markets moved marginally higher after the RBI Governor announced a repo rate cut following the Monetary Policy Committee (MPC) meeting today. The Nifty was trading at 23,576, about 11 points lower. Here are the key takeaways for equity markets:

1.) Rate cut on expected lines, but…

The MPC reduced the repo rate by 25 basis points to 6.25%, marking the first rate cut since May 2020. The committee maintained a neutral policy stance, with all members supporting the rate cut. While the move was in line with market expectations, some some are slightly disappointed for two reasons:

a) First, they were expecting a shift in stance from neutral to accommodative, which did not happen.

b) Second, there were no additional measures to enhance banking liquidity, a factor that could adversely impact credit transmission (i.e., how effectively banks extend credit to households and businesses).

What does this mean? For equity markets, it does not imply any immediate change.

2.) Economic growth on expected lines
The RBI projects GDP growth at 6.75% for the fiscal year ending March 2026, with an evenly distributed quarterly trajectory: 6.7% in Q1, 7% in Q2, and 6.5% each in Q3 and Q4. The Governor said there is recovery in rural demand, while urban demand remains mixed. He expects:

a) Tax relief in the Union Budget and healthy agricultural activity to boost household consumption.

b) Higher capacity utilization, robust expansion, and supportive government policies to drive investment growth this year.

3.) External risks – future rate cuts not a given

The Governor repeatedly highlighted risks from global financial markets. He emphasised that:

a) Excessive volatility in global markets and shifting trade policies require the MPC to remain vigilant.

b) RBI’s forex interventions aim to curb excessive volatility, not to maintain a specific rupee level.

Despite these efforts, the rupee has depreciated by 4.1% since the peak in September 2024. Given the persistent flight to the dollar, another rate cut is not guaranteed.

4.)Will rate-sensitive sectors benefit?

Typically, rate-sensitive stocks—such as banks, real estate, autos and consumer durables—stand to benefit from a rate cut. However, today’s market reaction was muted. The tax relief in the Union Budget, combined with softer interest rates, could support credit growth for households.

a) Consumer durables, auto, and real estate may see better growth in FY26. However, several stocks may have already priced in more growth than may actually materialise. Investors should watch for stock-specific corrections before taking fresh positions here.

b) Banks remain a reasonably valued segment of the market. May be set for reasonable returns going forward.

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