RBI monetary policy: Stock markets take central bank's cautious optimism in their stride

RBI policy did not cause any sell-off in stocks as the governor seemed to exhude confidence on growth in the coming fiscal.

Equity markets took the RBI monetary policy and Governor Shaktikanta Das’ inflation-focused statement in their stride on April 5 with benchmark indices trading flat-to-marginally down.

At 11.30 am, BSE Sensex was down 71.28 points, or 0.1 percent, at 74,156.35, and NSE Nifty 50 was down 26.9 points, or 0.12 percent, at 22,487.80. Market breadth was positive as 1,974 shares advanced, 1,268 shares declined, and 97 shares were unchanged.

The Reserve Bank of India’s Monetary Policy Committee (RBI MPC) voted by a majority of 5:1 to keep the repo rate unchanged for the 7th consecutive time. But that was expected. What the market was watching out for was the fine print: whether the governor keeps his eye on inflation, or on the need to support growth.

With Das' focus evidently on the ‘upside risks to inflation’, analysts are now convinced any rate cuts before Q3FY25 (October-December quarter) is improbable.

Despite rate cut not being in near-term horizon, it hasn't caused any sell-off in stocks as the RBI Governor exuded confidence on country's economic growth in the new fiscal year (FY25) .

“Domestic economic activity continues to expand at an accelerated pace, supported by fixed investment and improving global environment,” Governor Das said in his monetary policy speech. Further, RBI sees private consumption improving. “Strengthening of rural demand, improving employment conditions and informal sector activity, moderating inflationary pressures and sustained momentum in manufacturing and services sector should boost private consumption,” he added.

The rural demand is expected to pick up based on a normal monsoon, and then growth in incomes, said Shraddha Umarji, Economist - Institutional Research at Prabhudas Lilladher. Similarly, urban demand is also expected to receive a boost from higher employment in both formal and informal sectors, she said.

“Sectors reliant on domestic consumption, such as FMCG and retail, could benefit from stable financial conditions and improved consumer sentiment,” said Sonam Srivastav, smallcase Manager and Founder, Wright Research.

Governor Das also pointed out the external demand improvement in February with exports registering double digit expansion. “As global growth conditions improve, India’s external sector demand is expected to revive,” Umarji added.

RBI’s assessment of the investment scenario also seemed to support the optimism stock prices are reflecting about the upturn in the economic cycles. While commenting that government capex as well as private capex has shown steady progress, Governor Das also pointed at the pick up in private capex that has been muted overall and restricted to a handful of industrial segments.

“The resilience in cement production, together with strong growth in steel consumption and production and import of capital goods, augur well for the investment cycle to gain further traction,” said Governor Das.

The prospects of fixed investment remain bright with business optimism, healthy corporate and bank balance sheets, robust government capital expenditure and signs of upturn in the private capex cycle, he added.

Among other measures, RBI's proactive approach to addressing liquidity fluctuations have reassured bond markets, said Sonam of Wright Research. “From a stock market perspective, acknowledgment of surplus liquidity and the RBI's liquidity management efforts is a positive for banking stocks,” she added.

But banks did not show much enthusiasm as the Bank Nifty was trading marginally higher (0.35%) at 48,230.

Looking ahead, concerns over inflation and global economic risks may keep markets tentative. “The MPC remains vigilant to the upside risks to inflation that might derail the path of disinflation. Under these circumstances, monetary policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission of the past actions,” said Das.

As for the driver for the market, quarterly results will continue to dominate the narrative for the coming month apart from political banter, although markets are already pricing in a clear BJP win, experts said.

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