RBI Rate Cut Sparks Rally in Realty and Rate-Sensitive Sectors - Know What Investors Should Do

The Reserve Bank of India (RBI) has announced a cut in lending rates on December 5. The policy decision has led to upward movement in several indices such as the Nifty Auto, Nifty Bank, Nifty Financial Services and Nifty Realty trade in the green.

RBI’s Rate Cut Cheers Nifty Bank and Other Indices

The RBI’s Monetary Policy Committee has unanimously approved a rate cut of 25 basis points, reducing the terminal rate to 5.25 per cent. Following the development the Nifty 50 gained 0.3 per cent to an early high of 26,113.85 and the Sensex traded higher by 0.3 per cent to reach an early high of 85522.97 levels.

Among the rate-sensitive sectors, the Nifty Realty index gained the most in early trade, surging 1.4 per cent to an early high of 903.05 levels. The Nifty Bank gained  0.65 per cent to an intraday high of 59,679.35 levels. Other rate-sensitive sectoral indices such as the Nifty Auto index and the Nifty Financial Services index traded higher by 0.42 per cent and 0.69 per cent following the announcement.

Why Are Rate Sensitive Sectors Gaining

On December 5, rate sensitive stocks zoomed following the rate-cut due to the positive impact the rate-cut has on the fundamentals of their businesses. Here’s a look at why rate-sensitive indices are trading in the green today:

Banking and Financial Services

The gains seen in the Nifty Bank and the Nifty Financial Services index are likely to have occurred due to the anticipated benefit which banks and other lending institutions get from lower repo rates. A rate cut makes the cost of borrowing cheaper for lenders, as banks and non-banking financial companies (NBFCs) are able to borrow money at a lower rate from the central bank. On the other hand, the cut indicates a lower interest rate environment, which can eventually mean lower Equated Monthly Installments (EMIs) for borrowers. This in turn stimulates demand for all types of loans, which can potentially increase the overall loan book size.

Real Estate

The real estate sector is one of the most rate-sensitive sectors, a lending rate cut decreases floating-rate home loan interest rates. This lowers the EMI burden, making property purchases more affordable for the average buyer. On the developer’s end, lower interest rates directly result in reduced project financing costs.A rate cut can reduce the cost of project loans, which can then boost the cash flow, enhance project viability, and add to the company’s potential profits.

Automobile

Similar to housing, automotive demand is also driven by loans, thus a rate cut makes car loans and two-wheeler loans more affordable for buyers. This boost in affordability translates into higher sales volume. Additionally auto manufacturers which rely on debt for their operations are also likely to witness some reduction in their borrowing costs post the rate cut.

The effect of the rate-cut is expected to kick in the future quarters. However, rate sensitive indices are gaining from an anticipatory boost, making cyclical and rate-dependent sectors attractive to investors.

What Should Investors Do Amid The Rally?

As the rate-cut increases hopes around the future growth of rate–sensitive businesses and lifts investor sentiment, it becomes important to understand how, investor can make the most of the rally and leverage the anticipated long-term growth in these sectors as well.

Palak Shah, Vice President, Institutional Sales at Prabhudas Lilladher (PL Capital Group) told Outlook Money, that the large-cap stocks are expected to be the first ones to gain post the rate-cut, till earnings acceleration picks up following an anticipated uptick in consumer demand for loans, automobiles and real estate.

“Till earnings acceleration picks up , we will see gains in large caps which are beneficiaries of lower rates and consumption proxies,” Shah said.

Akshat Garg, Head - Research & Product, Choice Wealth told Outlook Money that the glide path for a broad-based rally beyond the large caps will only open up post a clearer earnings visibility and steady flows.

“A rate cut always loosens the financial pipes, but the first real beneficiaries are the large, rate-sensitive names—big banks, NBFCs, autos. That’s where institutional money parks itself. Mid- and small-caps don’t automatically rally with a cut; they need clearer earnings visibility and steady flows, not just cheaper money. So while sentiment improves across the board, the depth of liquidity will still be concentrated in large-caps for now,” Garg said.

Garg added that post the rate-cut, the next leg of the rally lies in the revival of demand in consumer durables, cement, housing-linked names, and capital goods. He added that these sectors offer better long-term visibility.

“With rate-sensitive stocks already reacting, the next leg of opportunity lies in sectors where lower rates slowly but meaningfully revive demand—consumer durables, cement, housing-linked names, and capital goods. These pockets haven’t fully priced in a recovery and usually gain when confidence returns, not on Day 1. If investors are looking beyond the knee-jerk rally, these downstream beneficiaries of consumption and capex offer better long-term visibility,” Garg said.

Garg added that the rally seen in rate-sensitive stocks today is a ‘relief bounce’ and long-term investors should avoid reacting to it. He added that if investors feel the valuations of their current holdings in rate sensitive stocks are stretched they can consider booking profits, otherwise it may be more prudent to wait for the full effect of the stimulus boost to kick in.

“Today’s rally is more of a relief bounce than a done-and-dusted trend. Investors who entered purely for the event can take some chips off the table, but long-term portfolios should avoid reacting to a single day’s move. Rate cycles play out over quarters, and the earnings tailwind usually lasts longer than the initial price spike. Unless the stock is trading at stretched valuations, the smarter strategy is to hold quality names and let the fundamentals catch up rather than rush to book early profits,” Garg said.

Garg shared his outlook and added that the real impact of the rate-cut is likely to play out in the upcoming two to three quarters.

“The real economic impact is usually felt two to three quarters later, and the earnings reflection comes with an additional lag for some sectors. Markets react instantly, but the actual business momentum builds gradually, especially in consumption-led and construction-linked sectors,” Garg said.

Shah added that the real impact will be felt when other global macroeconomic decisions become clearer, such as the US Federal Reserve’s policy decision regarding rate-cuts.

“This should play parallel as global liquidity also improves along with US rate cuts and some stimulus from the Federal Reserve,” Shah said.