 |
|
The Indian stock market is currently facing a period of uncertainty as it grapples with multiple headwinds, including fluctuating FII flows, escalating tariff hikes, and lackluster earnings growth. The Reserve Bank of India's (RBI) monetary policy stance has become a central point of discussion, particularly the potential for another surprise rate cut. The article explores the possibility of the RBI implementing a rate cut and analyzes its potential impact on the Sensex and Nifty, considering the broader economic context and global trade dynamics. The RBI, under Governor Sanjay Malhotra, has previously surprised financial markets with unconventional monetary policy actions. In February 2025, the RBI delivered a 25 basis point (bp) repo rate cut, reducing it to 6.25%, which marked the first rate cut in nearly five years. This move, while anticipated by the market, was still significant as it signaled a shift in the policy stance. Even more surprisingly, in June 2025, the RBI announced a larger-than-expected 50 bp rate cut, bringing the rate down to 5.50%, coupled with a 100 bp cut in the Cash Reserve Ratio (CRR), injecting substantial liquidity into the banking system. The central question now is whether the RBI will surprise the markets again with another rate cut, particularly as the Monetary Policy Committee (MPC) outcome is impending. While the general consensus among economists and market participants is that the RBI is unlikely to announce a rate cut in the upcoming MPC meeting, scheduled for August 7, some factions within the market still believe it is a possibility. State Bank of India (SBI), for example, expects the RBI to announce a 25 bps repo rate cut. According to SBI, a frontloaded rate cut in August could stimulate credit growth, potentially leading to an "early Diwali" for the economy, especially considering that the festive season in FY26 is also expected to be frontloaded. SBI further noted that historical data indicates a clear trend wherein repo rate cuts implemented ahead of Diwali tend to result in higher credit growth during the festive period. Harshal Dasani, Business Head at INVasset PMS, also anticipates that the RBI may implement a 25 bps rate cut to shield the Indian economy from the repercussions of new tariffs imposed by US President Donald Trump, particularly given that inflation remains within the RBI's comfort zone. Nuvama Institutional Equities, while predicting a status quo in the immediate future, does not dismiss the possibility of further rate cuts in the medium term. The brokerage stated that after front-loading a 50 bp rate cut and shifting to a neutral stance in the previous policy, the MPC is likely to maintain rates steady at 5.5%. Nuvama emphasizes the compelling case for more rate cuts, citing a slowing economy, evidenced by sluggish credit growth, declining passenger vehicle sales, subdued real estate sales, reduced corporate profits, weak exports, and stagnant capital expenditure. They also highlight that inflation remains benign. With fiscal policy focused on consolidation, Nuvama argues that the RBI should take proactive measures to revive demand. However, even with the RBI's rate cut and subsequent reductions in deposit rates by banks, deposit growth continues to outpace credit offtake, according to a CareEdge report. As of June 13, 2025, deposits experienced a sequential decline of 0.44%, reaching ₹230.7 lakh crore, indicating slower growth compared to the 12.1% growth rate (excluding merger effects) observed in the previous year. Credit offtake stood at ₹183.1 lakh crore, reflecting a year-on-year growth of 9.6%, which is significantly lower than the 15.5% growth recorded in the previous year, attributable to a high base effect and muted demand across various segments, including retail. Additional indicators, such as auto sales, further underscore the slowing economic momentum. Domestic passenger vehicle industry volumes contracted by 1.4% year-on-year in Q1 FY26. Two-wheeler industry volumes also decreased by 8% year-on-year during the same period, primarily due to the underperformance of the motorcycle and scooter segments on a higher base.
The introduction of new tariffs by the US, coupled with the threat of further penalties, presents fresh challenges to the Indian economy. In this context, analysts believe that even if the RBI implements a rate cut, it is unlikely to lead to sustained strength in the stock market. The real solution to revive the market bulls, they argue, lies in the resolution of the ongoing trade deal. Both the Sensex and Nifty have been rangebound for more than a month, influenced by a confluence of factors, including FII flows, tariff hikes, and weak earnings growth, which are collectively suppressing market momentum. According to Dasani, if the RBI delivers a surprise 25 bps rate cut in its August 5 policy, equity markets may initially react with cautious optimism. However, the underlying message conveyed by the move will significantly influence market sentiment. If the rate cut is positioned as a proactive measure aimed at supporting liquidity, lending, and overall economic growth amid global headwinds, markets may perceive it as a positive signal, indicating that domestic inflation is under control and that the central bank is confident about maintaining macroeconomic stability. Conversely, if the rate cut is interpreted as a response to downside risks to growth or external stress, markets may fear that the RBI is aware of underlying issues that are not yet fully reflected in market valuations. This could trigger a defensive rotation into sectors such as FMCG (Fast-Moving Consumer Goods) or IT (Information Technology). Dasani emphasizes that context is crucial. India's CPI (Consumer Price Index) at 4.8%, easing core inflation, strong GST (Goods and Services Tax) collections (₹1.72 lakh crore in July), and robust GDP expectations (approximately 7% for Q1 FY26) provide sufficient justification for the RBI to act without appearing desperate. Vinit Bolinjkar, Head of Research at Ventura Securities, acknowledges that the current events weighing on the Indian market warrant a rate cut. However, he remains skeptical about the RBI's immediate action, citing the recent depreciation of the rupee. Bolinjkar believes that even if the RBI were to cut rates, the market might experience a temporary surge but would likely resume its downtrend, given the unlikelihood of further rate cuts in the near future. He asserts that a resolution to the tariff dispute is essential for the market to embark on its next leg of upward movement. He also warns that the tariff war could escalate, potentially sending the market into a tailspin for at least one to two quarters. Vaibhav Vidwani, Research Analyst at Bonanza, anticipates a mixed market reaction, emphasizing that the interpretation would heavily depend on the underlying economic context. Analysts suggest that sectors such as banks, autos, and rate-sensitive housing stocks could experience a short-term rally on expectations of improved credit transmission and increased demand.
Ajit Mishra of Religare Broking, on the other hand, anticipates a negative impact on the market from the rate cut move. He suggests that it could act as a negative trigger if it signals underlying economic problems. The article presents a comprehensive overview of the potential implications of an RBI rate cut on the Indian stock market, taking into account various perspectives and economic indicators. The ultimate impact will depend on how the rate cut is communicated and interpreted by the market, as well as the broader global economic environment. The RBI's past actions have demonstrated its willingness to surprise markets with unconventional monetary policy measures. Whether the central bank will do so again remains to be seen. The MPC's upcoming decision on August 7 will be closely watched by market participants, economists, and investors alike. The Indian stock market's reaction to any potential rate cut will be a complex interplay of factors, including domestic economic conditions, global trade dynamics, and market sentiment. While a rate cut could provide some short-term relief and potentially boost specific sectors, the long-term sustainability of any market rally will depend on addressing the underlying issues that are currently weighing on investor confidence. These issues include global trade tensions, fluctuating FII flows, and weak earnings growth. The RBI's ability to navigate these challenges effectively will be crucial in ensuring the stability and growth of the Indian economy and its stock market. In conclusion, the possibility of an RBI rate cut is a significant development that could have far-reaching consequences for the Indian stock market. While the consensus is that a rate cut is unlikely in the immediate future, some analysts believe it is still a possibility, given the current economic climate and global uncertainties. The market's reaction to any rate cut will depend on a variety of factors, including how the move is communicated, the underlying economic context, and the broader global environment. Ultimately, the key to a sustained market rally lies in addressing the underlying issues that are currently weighing on investor confidence, such as global trade tensions, fluctuating FII flows, and weak earnings growth. The RBI's role in navigating these challenges will be crucial in ensuring the stability and growth of the Indian economy and its stock market. The article serves as a reminder of the complex interplay of factors that influence market behavior and the importance of careful analysis and consideration of various perspectives when assessing the potential impact of monetary policy decisions.