RBI reduces repo rate by 0.25% to 5.25%. Banking, auto, and real estate shares surge, financial companies up by up to 2%. OMO and USD/INR swaps boost market liquidity and strengthen investor confidence.
RBI Update: The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Friday cut the repo rate by 0.25% to 5.25%. This decision was taken unanimously, and the policy stance was maintained as 'neutral'. The direct impact of this decision was visible in the stock market, with rate-sensitive sectors, i.e., shares affected by interest rates, experiencing a surge. Banking, auto, and real estate sector stocks saw buying pressure from the morning. Shares of financial companies jumped by up to 2%, and investors took this step as a positive sign.
Surge in Banking, Auto, and Real Estate
Around 11 AM, the Nifty Realty and Nifty PSU Bank indices registered a 1% gain. Meanwhile, the Nifty Auto, Nifty Bank, and Nifty Financial Services indices saw an increase of 0.30% to 0.60%. In comparison, the Nifty 50 recorded a modest gain of 0.21%.
Under Nifty Financial Services, shares of SBI Cards, Shriram Finance, Cholamandalam Investment, Bajaj Finance, Bajaj Finserv, and Muthoot Finance rose by up to 2%. Among public sector banks, shares of SBI, Indian Bank, PNB, Canara Bank, and Bank of India were also up by 1% to 2%. Strength was also seen in real estate sector stocks such as DLF, Oberoi Realty, and Prestige Estates.
RBI's Initiative to Boost Liquidity
The RBI has taken significant steps to maintain adequate liquidity in the market. This month, the central bank will purchase government bonds worth ₹1 lakh crore (OMO Purchase). Additionally, a 3-year USD/INR swap deal of $5 billion will also be conducted. This will enhance permanent liquidity in the financial system and bring stability to the market. The objective of these measures is to instill confidence in investors and strengthen the banking system.
Reduction in Inflation Forecast
RBI Governor Sanjay Malhotra stated that both headline and core inflation are likely to remain at or below 4% in the coming period. This is a positive signal for investors and general consumers. Controlled inflation provides scope for easing interest rates, which in turn encourages both investment and growth.
Boost to Growth
Dr. V.K. Vijayakumar, Chief Investment Strategist at Geojit Investments, stated that the RBI has cut rates to further boost growth despite b economic growth. He explained that the banking sector might not benefit significantly from this, as lower interest rates could put pressure on their Net Interest Margins (NIMs). However, the auto and real estate sectors are expected to benefit, and demand in these sectors could increase.
Anil Rego, Founder of Right Horizons PMS, said that the RBI, by cutting the repo rate and maintaining a neutral stance, has taken into account the trend of declining inflation. He added that OMOs and FX swaps would ensure b market liquidity and stable financial conditions.
Impact of Lower Interest Rates
According to experts, lower interest rates could lead to improvements in housing, MSMEs, CAPEX, and industrial working capital in the future. If inflation remains under control and foreign investment flow remains stable, this step will help sustain India's growth momentum until FY27. This is an opportunity for investors to keep an eye on sectors positively impacted by the repo rate cut and potentially capitalize on them.
