RBI rate cut decision tomorrow: Six things equity investors should watch out for

RBI Monetary Policy

The RBI’s Monetary Policy Committee (MPC) meeting on June 6 is unlikely to move equity markets much, say experts Moneycontrol spoke to, as no major surprises are expected in the repo rate or policy stance. Instead, stocks are likely to be driven by earnings and global cues.

Also read: RBI to continue with liquidity infusion, may announce longer tenure Variable Rate Repo

Here are six key areas from the MPC that investors should keep an eye on, as per experts:

1. Repo Rate
What to Expect:
The RBI is widely expected to cut the repo rate by 25 basis points to 5.75%, marking its third cut in 2025.

Vaqarjaved Khan, Senior Fundamental Analyst at Angel One, said, “Most market participants are expecting a 25-bps cut in the June meeting, while a tiny fraction is also expecting a 50-bps cut. However, a 50-bps cut looks unlikely at this moment. We foresee a 25-bps rate cut to boost the current growth trajectory while keeping retail inflation in check.”

Why it matters:
The repo rate affects borrowing costs. A reduction encourages loans and spending, spurring growth and typically supporting market sentiment.

2. Sectoral and Market Impact
What to Expect:
Consumption-led sectors are expected to benefit, though banks may see mixed outcomes.

VR Krishnan, Head of Quantitative Research at Marcellus Investment Managers, said, “A 25 bps rate cut typically supports discretionary consumption. Most auto purchases in India are financed, so lower rates help automakers. With household debt rising, lower rates reduce interest costs and boost disposable income, benefiting consumer discretionary stocks.”

On the banking side, he added, “Many mortgages are repo-linked, so the benefit reaches borrowers quickly. But banks may struggle to lower deposit rates due to strong retail and CASA competition, potentially squeezing net interest margins.”

Vikas Gupta, Founder and CEO of Omniscience Capital, said a rate cut of more than 25 bps or a strong dovish stance could trigger a stronger market reaction. He also flagged infrastructure as a potential gainer: “For industrial/corporate capex and infrastructure, lower interest rates make more projects viable, boosting loan demand,” he said.

Nirav Karkera, Head of Fundmental Research at Fisdom noted, “There is scope for a 50 bps rate cut, but it would not be surprising if the central bank instead opts to retain the accommodative stance without altering policy rates. While market expectations do align with the possibility of a rate cut, a status quo outcome could lead to immediate disappointment, particularly for rate-sensitive sectors such as banking, financials, real estate, automobiles, and capital-intensive industries.”

Why it matters:
Lower rates reduce EMIs and loan costs, supporting autos, real estate, and durables. But investor reaction hinges on whether the cut aligns with expectations.

3. GDP Growth
What to Expect:
India’s GDP grew 7.4% in Q4, led by manufacturing and construction. Despite global uncertainty, the RBI is likely to keep its FY25 and FY26 growth forecast at 6.5%. While a few expect a minor revision, most don’t anticipate changes.

Karkera added, “Globally and domestically, growth momentum appears to be softening. From a growth standpoint, a 50 bps cut would be justified. However, the timing may be pushed forward in favour of greater clarity and stability.”

Why it matters:
Strong GDP growth allows rate cuts without stoking inflation. It keeps investor confidence intact and gives RBI policy space. Experts caution that if growth falls below 6%, high market valuations may prompt FIIs to exit to cheaper global markets.

4. Inflation
What to Expect:
Retail inflation dropped to 3.16% in April, the lowest since July 2019, well below the RBI’s 4% target. Core inflation remained below 3.5%, strengthening the case for easing.

A Moneycontrol poll found some experts expect the RBI to lower its inflation forecast, given subdued food and headline inflation. Krishnan said, “Core inflation has been trending below 3.5%. With low inflation, there’s room to reduce nominal rates and bring the real rate into the 2–2.5% band. Markets might expect one more rate cut if inflation stays low and monsoons are normal.”

Gupta added, “Monsoon outlook and its impact on food prices are key. If food inflation remains contained, chances of further rate cuts this year are high.”

Karkera noted that core inflation remains benign, and the current account deficit appears to have stabilised at relatively lower levels. “Retail inflation has cooled more than anticipated. While there seems to be limited reason for an aggressive rebound in prices—especially given the presence of a negative output gap—the central bank is likely to maintain a neutral stance on inflation, erring on the side of caution,” he said.

Why it matters:
Low inflation eases pressure on household budgets and gives the RBI space to cut rates and support growth.

5. Banking Liquidity
What to Expect:
Since January 2025, the RBI has infused nearly $100 billion into the banking system, Reuters reported. More such measures may follow, but major policy tools like CRR are unlikely to be touched. Krishnan said, “There is some expectation of liquidity infusion in the budget, but CRR (at 4%) is unlikely to be adjusted. CRR is a tool used during stress, which isn’t the case now. Liquidity has improved since January when there was a deficit due to FII outflows and rupee pressure. The system is currently in surplus.”

Karkera added, “Systemic liquidity is no longer a constraint, with the central bank expected to maintain surplus liquidity to support effective transmission.”

Why it matters:
While equity markets may not react immediately to liquidity moves, bond markets and credit growth could be affected.

6. FII FlowsWhat to Expect:
Some experts believe that a narrowing interest gap could reduce FPI inflows. With lower yield advantages, Indian debt becomes less appealing. If growth falters, equities may also see slower FPI demand, tightening liquidity and raising volatility.

But Krishnan believes the traditional interest rate gap between Indian and US yields matters less now. “US 10-year and 30-year Treasury yields are high due to fiscal concerns. FIIs are more focused on Indian fundamentals and valuations than yield spreads.”

Gupta, however, remains optimistic: “Rate cuts will be positive for FII flows. Higher valuations are justified, and lower interest rates will support GDP and earnings growth.”

Karkera too suggested that should a rate cut materialise, it would signal a pro-growth stance amid a tepid global growth environment, likely strengthening India’s appeal to foreign institutional investors and supporting renewed interest in domestic equities.

Why it matters:
FII flows drive liquidity and sentiment. Even small changes in positioning can move markets sharply.