Stock market, RBI policy: Growth rise, rupee slump- MPC on knife edge to cut or hold rates

The Reserve Bank of India (RBI) is set to announce its monetary policy on Friday at 10 am with market participants are divided over the central banks policy decision as strong economic growth and a weakening rupee cloud the case for a rate cut. On the other hand, a rate reduction could spur a short-term rally as demand momentum has already been aided by the recent tax cuts.

India's economy grew at its fastest pace in 18 months in the September quarter, lifted by robust consumer spending, while retail inflation slumped to a record low in October. Expectations of a rate cut eased after the better-than-expected growth data and the recent slide in the rupee.

"We expect RBI to raise its growth projection by at least 20 bps to 7 per cent and lower its inflation forecast by 40 bps to 2.2 per cent in FY26. The currency has depreciated sharply in recent days; however, currency management does not come within the ambit of the MPC, hence the policy decision will not be aimed in this direction," said JM Financial.

The markets lack direction and the need of the hour will be effective communication by the regulator. Hence, regardless of whether a rate cut is delivered or a status quo is maintained, the tone of the policy will be the key monitorable. The RBI can announce OMOs to ensure that appropriate liquidity is maintained, which, along with a change in stance to “accommodative”, will soften yields, it said.

The RBI has a tough task at hand focusing on its dual mandate of supporting growth while maintaining price stability. Markets are divided on the RBI’s monetary policy expectation in December, specifically after the robust GDP print that followed the series low inflation. The RBI’s policy decision should also ensure an effective transmission in yields, said experts.

YES Bank expects the RBI to stay on a pause in December and keep rates and stance unchanged, space for incremental rate cuts by the RBI is limited. RBI is expected to reduce its inflation forecast to 1.8-2.0% to account for lower-than-expected prints. GDP expectations of the RBI can also go up by around 20-40 bps, it noted.

Axis Asset Management believes that its important that RBI continues with its dovish stance on rates/liquidity to prevent tightening financial conditions or perceived higher rates that could hurt GDP in the next financial year. "RBI would ensure agile liquidity management. The December MPC is pivotal. We expect limited easing, liquidity-driven support and range-bound yields."

"We are yet to change our base case assumption of no rate cut in December. Our contention has been that given external account uncertainties, sensitivity against INR depreciation might become the decisive policy motivator," said Santanu Chakrabarti, Banking and Finance Analyst at BNP Paribas India.

"A stable GDP growth print and outlook further add to our inkling that the recent fiscal incentives, liquidity support and credit policy will remain the favoured tools of economic accommodation. The sharp drop in the INR versus the USD in the last few days perhaps only persuade further in favour of policy caution," it said.

BNP Paribas continue to expect some incremental momentum on credit growth. Given assumption of no further rate cuts, the margin impact of loan yield drops should be largely over in 1HFY26. Earnings growth will start improving materially from 3QFY26 with double digit FY26 exit earnings growth for our preferred large private banks including HDFC Bank, ICICI Bank & Axis Bank."

What for other investments

The recent rate cut is expected to have a significant impact on home loan rates in the coming months, assuming banks and HFCs quickly pass the benefit on to the borrowers, said Anurag Goel, Director, Goel Ganga Developments. "This act can spark a revival in the areas where the price hike was already felt, and at the same time, it would contribute to pro-cyclical and healthy upcycling."

Instead of panic, this is the right time to think in a strategic way. One of the best means is FD laddering: dividing the investments into different tenures so that not all the deposits will be locked at the current lower rates, and there will always be some maturities ready to take the rates if the cycle changes, said Shashank Gupta, Director at RPS Group.

"Senior citizens can choose a combination of bank FDs, high-rated corporate FDs, and small savings schemes for safety with slightly higher yields instead of depending on just one product. On the other hand, Rs 1,850 will be the drop in monthly home loan EMI for a Rs 35 lakh loan over 20 years, which is a support for the borrowers," he said.