By Vineet Kumar 
The Indian stock markets are on edge as the Reserve Bank of India (RBI) prepares to unveil its bi-monthly monetary policy decision on Friday, December 5. With the Sensex and Nifty climbing 1% on Thursday, all eyes are on whether RBI Governor Shaktikanta Das and the Monetary Policy Committee (MPC) will provide a liquidity boost by cutting the repo rate or the cash reserve ratio (CRR). A repo rate cut could inject much-needed optimism into the markets, while a CRR cut would release liquidity into the banking system, providing an alternative path to stimulate the economy.
What Experts Expect from the RBI
The majority of economists surveyed expect the RBI to keep the repo rate steady at 6.5%, citing elevated inflation levels and a neutral policy stance from October’s meeting. However, a smaller faction is hopeful for a CRR cut of up to 50 basis points. If implemented, such a move could infuse ₹1–1.25 lakh crore into the banking system, potentially boosting credit growth and investments.
The policy announcement comes amid a backdrop of weaker-than-expected GDP growth, which slowed to 5.4% in the July–September quarter. This data has intensified calls for liquidity-enhancing measures to counteract the economic slowdown.
Market Sentiment Without a Rate Cut
If the RBI refrains from cutting the repo rate tomorrow, the immediate impact on the Sensex and Nifty may hinge on how Governor Das addresses concerns about economic growth and liquidity. Markets are currently factoring in the possibility of no rate change, but even a hint of future easing could provide some support.
A status quo on rates may trigger profit booking in interest rate-sensitive sectors like banking, real estate, and auto, which have rallied on expectations of easing. However, any forward guidance hinting at rate cuts in the second half of 2024 could cushion this impact.
CRR Cut: A Likely Middle Ground
While a repo rate cut seems unlikely at this stage, a CRR cut could be a game-changer. By releasing additional liquidity into the system, the RBI could support credit flow to industries, alleviating some pressures without directly affecting inflation.
Kranthi Bathini, Director of Equity Strategy at WealthMills Securities, highlights the broader context:
“The rate cut cycle has already begun in the US, though India has yet to follow suit. While an outright rate cut might not happen tomorrow, rate reductions are likely in the latter half of 2024, benefiting interest rate-sensitive sectors in the long run.”
Key Takeaways for Market Participants
1. Immediate Impact: Expect volatility in Nifty and Sensex, particularly in rate-sensitive sectors, if the RBI holds rates steady.
2. Forward Guidance: Governor Das’s commentary on growth and inflation will be crucial for shaping market sentiment.
3. Sectoral Focus: A CRR cut could be a lifeline for banks, while a lack of any liquidity-enhancing measure may weigh on sentiment in the short term.
The markets are walking a tightrope between hopes for easing and the reality of high inflation. A balanced approach by the RBI, even without a rate cut, could signal stability and set the tone for equity markets heading into 2024.
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