Moneycontrol Pro Panorama | Bounty for Mr Market, strings attached

Since banks comprise a significant part of the market capitalization, it can boost key market indices and their underlying index funds.

Dear Reader,

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

The stock market has been clutching at straws of late. Geopolitics continues to be an overhang, with the wars continuing and Trump’s latest salvo on tariffs raising risks. Domestic earnings have been lacklustre even as GDP growth appears fine. Consumption presents a mixed picture as does capex revival. It is in this macro mix that RBI has injected some positivity, with a 50 basis point repo rate cut topped up with a 100 bps reduction in the cash reserve ratio (CRR).

A 25-basis point rate cut in this meeting and the next was the consensus. A frontloaded cut means near term rates will decline much more than if it had been phased out. Even with delayed transmission. Lower cost of funds benefits borrowers--corporates and more importantly, consumers. It lands during peak monsoon season, making farmers happy, but also well ahead of the festival season that benefits rural and urban consumers. The CRR cut will be done in phases starting September, right in time for the busy season.

The incremental macro impact of the CRR cut on liquidity may not be much, as the RBI’s focus on ensuring durable liquidity means that systemic liquidity is comfortable already. But it frees up funds for banks, which if deployed in higher yielding avenues improves the outlook for earnings. Since banks comprise a significant part of the market capitalization, it can boost key market indices and their underlying index funds, assuming other things remain constant. It’s no surprise then that the leaders among gainers are banks and NBFCs (their cost of funds will decline as well as they borrow from banks).

In today’s edition, we have a comprehensive coverage of the monetary policy decision, both from the macros, the banking sector, and equities. My colleague Neha Dave takes a comprehensive look at the macro picture that the MPC may have looked at, before arriving at its decision. She points to the fact that GDP growth and liquidity may have been comfortable, but a moderating outlook for inflation and the significant risks posed by geopolitics –chiefly tariffs—would have been a key reason for the frontloaded cuts.

Apart from this, domestic consumption also gave some reason for worry. Dave writes, ‘Both these factors – weaker private capex and muted urban consumption – are reflected in the banking system’s credit growth that has fallen to below 10% as of 16th May. As a broad-based and durable consumption recovery is increasingly critical for a revival in the private capex cycle, RBI has delivered a bumper rate cut and liquidity boost that in turn will increase credit offtake.’

Dinesh Unnikrishnan, my colleague who tracks the banking sector very closely, wisely asks us to not be too wide-eyed about the stimulus but to pay close attention to what the shift to a neutral stance means. He writes, ‘Despite the bold rate cut and CRR reduction, the neutral stance signals caution. Global trade frictions, including tariff wars, threaten supply chains and commodity prices. Domestically, erratic weather could spike vegetable prices, while rising metal costs may push wholesale inflation higher.’

Therefore, the same risks that necessitated monetary policy support could lead to higher inflation which can then become a headache, as the MPC is tasked with an inflation-targeting mandate. As Unnikrishnan points out, ‘Beyond the pro-growth moves, the key message is clear: the RBI is poised to pause, watch, and respond, balancing bold action with prudent caution.’

Finally, which sectors and stocks gain from the monetary stimulus will be of interest to our readers. The outsized monetary stimulus means that investors will gain a little more confidence on the outlook for equities. They write, ‘The expansionary monetary policy aims to invigorate both investment and consumption. More importantly, the injection of liquidity is expected to lower EMIs and borrowing costs, creating more discretionary cash for the middle class and MSMEs, thereby providing surplus cash for discretionary spending.’ While that’s a macro outlook, they map out the sectors that will benefit the most –housing, hotels, construction products, power are just a few—and then the stocks in these sectors that investors should keep a watch on. Don’t miss reading it.

One last thing. While the RBI has cut rates, US Fed chair Jay Powell has refused to be cowed down by Trump’s demand to cut rates even after his accusation of the Fed being ‘too late’. While Powell can take some solace in Musk now being in the same corner as him, after having publicly fallen out with Trump, today’s FT selection (exclusively for Pro subscribers) says that the Fed may have to do a rethink on rates if the data points in that direction. If that proves to be true, it could be more good news for domestic equity markets.

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Ravi AnanthanarayananMoneycontrol Pro