Indian stock markets witnessed a mixed reaction following the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) announcement. While indices opened in the green, mid-day trading saw a dip as benchmark indices Sen-sex and Nifty declined in response to updates on key economic indicators, policy rates, and revised projections.
Market Movement Post-Announcement
The 30-share BSE Sen-sex initially opened higher at 81,887.54 points, registering a 0.15% gain. Similarly, the NSE Nifty 50 gained 0.09% to open at 24,729.45 points. However, following the RBI’s policy announcement, both indices reversed their gains. The Sen-sex fell by 259.67 points, settling at 81,506.19, while the Nifty dipped by 87.9 points to reach 24,620.50.
RBI Maintains Status Quo on Policy Rates
The RBI’s MPC decided to keep the repo rate unchanged at 6.5% for the 11th consecutive time. Governor Shaktikanta Das announced that the policy stance would remain neutral, reflecting the central bank’s focus on balancing inflation control with growth considerations. The decision follows a series of six rate hikes between May 2022 and April 2023, which aggregated to 250 basis points.
GDP Growth Forecast Revised Downward
One of the major takeaways from the policy update was the sharp revision of the GDP growth forecast for the current fiscal. The RBI reduced its projection to 6.6%, down from the earlier estimate of 7.2%. This adjustment comes in light of the July-September quarter’s GDP growth rate, which fell to 5.4%, a seven-quarter low. The decline indicates a slowdown in economic momentum, prompting a cautious approach from the central bank.
Inflation Target Raised
The RBI also revised its inflation forecast for the fiscal year, increasing it to 4.8% from the earlier estimate of 4.5%. Governor Das emphasized the importance of price stability, especially amid rising costs of essential commodities. The upward revision signals the challenges posed by inflationary pressures, even as the central bank maintains its focus on economic stability.
Cash Reserve Ratio (CRR) Cut to Boost Liquidity
In a move to enhance liquidity and support economic activity, the RBI reduced the Cash Reserve Ratio (CRR) by 50 basis points, bringing it down to 4% from 4.5%. This decision is expected to release ₹1.16 lakh crore into the banking system, increasing banks’ lending capacity and potentially spurring economic growth.
The CRR represents the percentage of a bank’s total deposits that it must maintain as liquid reserves with the RBI. The reduction aims to lower banks’ cost of funds and ease liquidity constraints in the financial system.
V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, praised the decision, calling it “an excellent policy response” for both the economy and the markets. He noted that the liquidity injection would benefit the banking sector, keeping banking stocks resilient.
Sectoral Performance and Market Gainers
Post-announcement, market reactions were mixed across sectors. Among the laggards were major players like Infosys, UltraTech Cement, Tata Motors, Hindustan Unilever, Tata Consultancy Services, and Asian Paints. These stocks experienced selling pressure as investors reacted to revised economic projections.
On the other hand, banking and financial stocks showed resilience. Axis Bank, ITC, Larsen & Toubro, Titan, State Bank of India, and Power Grid emerged as gainers, reflecting positive sentiment around the CRR cut and increased liquidity.
Foreign Institutional Investment Trends
Foreign Institutional Investors (FIIs) continued their buying spree, injecting ₹8,539.91 crore into equities on Thursday, according to exchange data. This inflow indicates sustained interest from foreign investors, despite the cautious domestic outlook highlighted by the RBI’s revised projections.
Balancing Growth and Inflation: A Delicate Act
The RBI’s decisions reflect the central bank’s effort to strike a balance between supporting economic growth and addressing inflationary pressures. The unchanged repo rate signals a cautious approach to monetary policy, aiming to maintain stability amid global uncertainties and domestic challenges.
The revised GDP growth forecast of 6.6% underlines the need for fiscal and policy measures to address slowing economic activity. Simultaneously, the upward adjustment of the inflation target to 4.8% acknowledges the persistence of inflationary pressures, driven by factors such as rising input costs and commodity prices.
The CRR reduction demonstrates the RBI’s commitment to boosting liquidity and enabling banks to increase credit flow to businesses and consumers. By releasing ₹1.16 lakh crore into the banking system, the central bank aims to create a more conducive environment for economic recovery.
Outlook for Indian Markets
The immediate dip in Sen-sex and Nifty reflects investor caution in response to the RBI’s announcements. While the CRR cut and liquidity injection are expected to benefit banking and financial sectors, the downward revision of GDP growth and the rise in inflation projections could weigh on market sentiment in the short term.
In the longer term, the effectiveness of the RBI’s measures in balancing growth and inflation will determine the trajectory of the Indian economy and stock markets. Investors will closely monitor upcoming economic data, corporate earnings, and global developments for cues on market direction.
The RBI’s fifth bi-monthly monetary policy announcement for the fiscal year brings a mix of cautious optimism and concern. While the decision to maintain the repo rate and inject liquidity through a CRR cut is welcomed, the downward revision of GDP growth and rising inflation target highlight the challenges ahead. The stock market’s reaction underscores investor sensitivity to these macroeconomic signals.
As the RBI navigates the complexities of growth and inflation management, its policies will play a pivotal role in shaping India’s economic recovery and market dynamics in the coming months. For investors, the focus will remain on sectors that stand to benefit from increased liquidity and resilient growth opportunities amidst evolving economic conditions.