RBI MPC Meet On Friday: How Will Markets React To Rate Decision? Expert Take

The Reserve Bank of India’s ( RBI ) Monetary Policy Committee (MPC) commenced its penultimate meeting for FY 2024-25 on December 4, with the much-awaited repo rate decision slated for 10 AM on December 6.

On Thursday, Nifty 50 index closed at 24,708, gaining 0.98% after touching a high of 24,857 during the day,  while the BSE Sensex closed at Rs 81,765.86, up 1.00% compared to the previous close of Rs 80,956.33.

Despite recent economic headwinds, market sentiment remained steady as investors awaited the central bank's policy stance.

Repo Rate Stability Since February 2023
The RBI has maintained the repo rate at 6.5% since February 2023, prioritizing inflation control while supporting economic growth. However, recent data underscores mounting challenges.

India’s Q2 GDP growth for FY2024-25 dropped to 5.4%, marking seven-quarter low, amplifying calls for monetary easing to stimulate growth.

Yet, inflation remains a hurdle. The Consumer Price Index (CPI) inflation rate was 6.2% in the latest print, exceeding the RBI’s comfort zone. Additionally, the rupee has weakened significantly, fueled by $14 billion in foreign institutional investor (FII) outflows over the past two months.

Economists Advocate Caution and Liquidity Support
Economists remain divided on the MPC’s course of action. Siddharth Sanyal, Chief Economist at Bandhan Bank, expects the RBI to maintain the repo rate but adopt a flexible stance. “We anticipate no rate cuts in December. However, the RBI might step up liquidity support to foster healthy credit growth, particularly for productive sectors,” he stated.

Ankita Pathak, Chief Macro and Global Strategist at Ionic Wealth suggested a neutral-to-dovish outlook. "A growth shock makes a strong case for easing, but inflation and currency concerns persist. Even if rate cuts are deferred, the RBI may consider easing measures like restoring the CRR to 4%,” she said.

Market Insights: Investor Sentiment Resilient Despite Macroeconomic Pressures
Market participants are wary of multiple headwinds, including slowing growth, high inflation, and a depreciating rupee. 

According to Ajay Bagga, Executive Chairman of OPC Asset Solution, government bond yields are already factoring in a 25 basis point rate cut. “Over the past week, Gilt yields have moved down 25 bps in the long maturities. There is a slight chance of a rate cut on Dec 6th. Interest rate-sensitive sectors from real estate to financials to automobiles will rally in case this comes through. Gold normally rises as interest rates are cut. The Rupee will fall a bit,” Bagga told this reporter.

Akshat Sisodia, a prominent investor, expressed scepticism about immediate rate cuts in a post on X (formerly Twitter). He wrote:“Inflation was already a hurdle; the swift rupee slide complicates rate cuts further. Monetary policy alone cannot fix these challenges. Fiscal intervention from the government may be necessary to address structural issues….Market has shrugged off lower GDP nos., poor earnings, high inflation and adverse currency move till now, will be interesting to watch how this pans out in future.”

 

What Lies Ahead?
While a rate cut in December appears unlikely, market experts anticipate dovish signals and symbolic measures. Forward guidance and  liquidity support could play a pivotal role in shaping sentiment.

With markets performing steadily despite macroeconomic challenges, Friday's RBI announcement will be a key determinant of investor confidence and market trajectory in the coming weeks.