Impact of RBI's Policy on the Indian Stock Market

The much anticipated monetary policy of the RBI has been announced.

India's central bank has maintained its repo rate at 5.5%.

But the big news of the day was the central bank keeping the door open for rate cuts.

Why is this significant and how will it impact the Indian stock market?

Read on...

Significance and Breakdown

First thing's first, here's the news in case you missed it.

This from ET...

• The Reserve Bank of India (RBI) governor Sanjay Malhotra-led Monetary Policy Committee (MPC) announced that the repo rate has been kept unchanged at 5.5% in its October policy review.
  
  The RBI has cut the repo rate by 1% or 100 basis points this year from 6.5% to 5.5%, bringing down EMIs for the common man.
  
  This is the first RBI monetary policy meeting since Donald Trump's 50% tariffs on India came into effect.

The market did not have high expectations of a repo rate cut. But the reaction was positive, nonetheless.

Why?

The market took note of the dovish nature of the policy, specifically the central bank keeping the door open to rate cuts if the need arises.

Stock markets like the possibility of rate cuts. This is because when interest rates, i.e., the price of money, falls, it provides a boost to asset prices like stocks.

This is, in turn, due to the fact that all asset prices are decided, directly or indirectly, by the interest rate one can get by not taking any risk. This is usually the government bond yield.

So, when the RBI signals lower rates are potentially on the way, riskier assets like stocks do well due to higher demand.

That's what we saw play out today on the Indian stock market.

Inflation Forecast

The other important point was the RBI's inflation forecast. The Reserve Bank has projected CPI inflation at 2.6%. This is lower than the current estimate of 3.1%.

The RBI's inflation forecast has been trending down for many months now. This is in line with retail inflation in India slowly coming under control. The good monsoon and stable crude oil prices have helped a lot in this regard.

Now, this has opened the possibility of future rate cuts which has been welcomed by the markets. However, the RBI will likely wait and watch to see how inflation and growth plays out before taking the decision to cut rates.

But that hasn't stopped the market from believing a rate cut will happen at the next meeting. The bulls can get carried away at times!

Growth Forecast

Finally, the RBI's GDP growth forecast was updated to 6.8% for FY26. This is against the earlier expectation of just 6.5% growth this year.

This means the RBI is expecting an economic recovery despite the tariff pressure from the US but it's not expecting a sharp one.

The recent GST rate cuts are expected to reduce the impact of tariffs as per the central bank.

Outlook

The fact that the RBI is not expecting a sharp economic recovery is actually a good thing for the stock market. This is because the market's main concern is higher interest rates caused by higher inflation.

As long as inflation is in check, the risk of rate hikes does not arise.

In fact, now the market is looking forward to potential rate cuts.

This has lifted sentiment in the stock market.

Conclusion

The boost to sentiment in the stock market is likely to be short term in nature.

Investors should not get carried away by this possibility.

Interest rates can have an impact on stock prices but in the long term, stocks go up or down because of the underlying fundamentals of the company.

Thus, if you choose to speculate on a fundamentally weak stock in anticipation of rate cuts, you would be putting your hard earned money at risk.

Happy investing.

Investors should evaluate the company's fundamentals, corporate governance, and valuations of the stock as key factors when conducting due diligence before making investment decisions.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...