RBI Maintains Status Quo on Repo Rate: What It Means for Investors

The Reserve Bank of India (RBI), in its bi-monthly Monetary Policy Committee (MPC) meeting held on December 4-6, 2024, maintained the repo rate at 6.5%. This decision underscores the balancing act between managing inflationary risks and supporting growth. The vote was not unanimous, with four out of six members favoring the pause, while two advocated a 25-basis-point cut.

Inflation Concerns Loom Large

Inflation remains a key driver of RBI’s cautious stance. October’s Consumer Price Index (CPI) inflation breached the central bank’s 6% upper tolerance limit, primarily driven by rising food prices. The MPC revised its inflation forecast for FY2024-25 upward to 4.8%, from 4.5% previously, with the baseline expectation of inflation easing to 4% by Q2 FY2025-26.

However, there is optimism about food inflation moderating in the coming months due to the arrival of fresh harvests and stable global oil prices, which are currently anchored around $73-$75 per barrel. Core inflation, which remains below the 4% mark, is less of a concern, though its upward trend warrants monitoring.

Growth Outlook: Slower Start but Signs of Recovery

India’s GDP growth for FY2024-25 has been revised downward to 6.6% from an earlier projection of 7.2%. The first half of the fiscal year witnessed a marked slowdown, with Q2 growth slipping to 5.4%, a seven-quarter low. However, the RBI remains optimistic about a recovery, expecting growth to pick up in the second half, supported by government capital expenditure, strong agricultural production, and improving rural demand.

High-frequency indicators suggest a turnaround in Q3 FY2024-25, with urban consumption showing resilience and industrial investments gaining momentum due to high capacity utilization rates. The services sector continues to be a key pillar of growth.

Liquidity Measures to Support Growth

While the policy rate remains unchanged, the RBI addressed liquidity concerns by cutting the Cash Reserve Ratio (CRR) by 50 basis points in two phases—25 bps effective December 14 and another 25 bps from December 28. This move is expected to inject ₹1.16 trillion into the banking system, alleviating liquidity tightness caused by factors such as forex interventions and seasonal cash demand.

Additionally, the ceiling rate on FCNR (B) deposits has been raised by 1.5% above the reference rate until March 2025, aiming to attract non-resident capital inflows and bolster the banking system’s liquidity.

Navigating the External Landscape

The global economic backdrop adds complexity to RBI’s policy decisions. The U.S. Federal Reserve’s evolving stance, coupled with geopolitical uncertainties, has exerted pressure on the Indian rupee and led to foreign portfolio investor (FPI) outflows. India’s forex reserves, though robust at $657 billion, have seen a drawdown in recent months.

Despite these challenges, India’s inclusion in multiple global bond indices, such as the JP Morgan Government Bond Index and the upcoming FTSE Russell inclusion, has improved demand for government securities, supporting lower yields.

What Should Investors Do?

1. Fixed Income Opportunities:

The bond market is already pricing in a potential 25-basis-point rate cut in early 2025, as reflected in softening G-sec yields, currently at 6.8%. Investors can consider longer-duration bonds or gilt funds to benefit from potential capital appreciation as yields decline further.

2. Equity Market Strategy:

The RBI’s liquidity infusion and dovish commentary provide a supportive environment for equities. Sectors such as infrastructure, manufacturing, and rural-focused industries are poised to benefit from increased government capex and improving rural demand. Defensive sectors like FMCG may remain resilient amidst inflationary pressures.

3. Monitor Inflation and Growth Trends:

The trajectory of inflation and high-frequency economic data will significantly influence RBI’s future actions. Investors should closely monitor indicators such as CPI inflation, rural demand recovery, and government spending patterns.

4. Currency and Global Factors:

Given the volatility in global markets and the potential for sustained FPI outflows, currency-focused investors should hedge against rupee depreciation. Diversifying investments into international funds may help mitigate currency risks.

5. Short-Term Liquidity Plays:

Investors looking for short-term opportunities can explore money market and ultra-short-term funds, as the CRR cut will ease liquidity and keep short-term rates anchored to the policy rate.

Outlook: Rate Cuts on the Horizon?

The RBI has left room for a potential rate cut in February 2025, contingent on inflation easing as projected. Under the current neutral policy stance, a cumulative 50-basis-point rate cut could be in the cards over the next 6-9 months. However, if growth disappoints and inflation risks recede further, a shift to an accommodative stance could pave the way for deeper cuts.

For now, the central bank’s priority remains clear: maintaining price stability while ensuring adequate support for growth. Investors should align their strategies with these dynamics, balancing risk and reward across asset classes.

Market this week

Source: BSE and NSE

• The Indian equity market extended its bullish run for the third consecutive week, with benchmark indices recording their largest weekly gains in six months.
• Positive global cues, falling crude oil prices, and an inline RBI policy announcement supported market sentiment.
• Sectoral performance highlights: Nifty Realty and PSU Bank indices surged by 5% each, Nifty Metal and Media indices gained 4% each and Nifty IT index advanced nearly 4%.
• Foreign Institutional Investors (FIIs) emerged as net buyers, purchasing equities worth ₹11,933.59 crore during the week.
• Domestic Institutional Investors (DIIs) also contributed to the buying momentum with net equity purchases of ₹1,792.47 crore.

Weekly Leaderboard

Source: BSE

Stocks that made the news this week:

• Vibhor Steel Tubes saw a 12% surge on December 6 after announcing that its Unit III plant in Sundargarh, Odisha, is now fully operationally ready. The company plans to commence operations at the unit by the end of January 2025, boosting investor confidence.
• BSE Ltd hit a record high of ₹5,409.65 on December 6, marking a 19% rally over three sessions. The stock’s sharp rise was fueled by soaring trading volumes, with 35 lakh shares exchanged, surpassing its one-month daily average of 34 lakh. In the previous session, one crore shares changed hands, nearly tripling the monthly average, highlighting strong investor interest.
• Multi-Commodity Exchange (MCX) skyrocketed 8.5% on December 6, reaching a new high of ₹7,048.60. The stock gained momentum on heavy volumes, with seven lakh shares traded—double its monthly average. Strong Q2 results further boosted sentiment, as MCX reported a net profit of ₹153.6 crore versus a loss of ₹19.1 crore last year, alongside a revenue surge of 73% to ₹285.6 crore and a robust EBITDA margin of 62.8%.