RBI's Liquidity Injection Raises Expectations for Rate Cuts

The Reserve Bank of India (RBI) has injected Rs 1.5 lakh crore into the banking system. In general, it's believed this is a precursor to a rate cut. The banks can forward the benefit of rate cuts to borrowers if there is enough liquidity in the system. Therefore this is an important development for borrowers before RBI's rate decision scheduled for next week. 

“We think that these moves are a precursor to RBI cutting rates and this will be beneficial for home loan borrowers as the rates might come down,” says Prashasta Seth, CEO, Prudent Investment Managers. 

What It Means For Investors 

The RBI's move has bolstered market sentiment, particularly in rate-sensitive sectors like banking and non-banking financial companies (NBFCs). 

“Following the announcement, stocks in these sectors experienced notable gains, with institutions such as HDFC Bank, AU Small Finance Bank, and IDFC First Bank seeing increases of around three per cent. Investors may view this as an opportune moment to invest in financial stocks, anticipating improved profitability due to lower funding costs and increased lending activities,” says Dipak Samanta, executive director, Urban Money, a tech-enabled loan platform. 

The recent developments clearly present a range of implications for investors in the current market landscape. “With long-dated government securities becoming an attractive option we see notable potential for capital growth. The G-Sec yield reaching a three-year low indicates that traditional fixed-income investments are no longer offering competitive returns, pushing investors to rethink their strategies,” says Anand K Rathi, co-founder, MIRA Money, an investment management platform.

This shift could prompt a re-evaluation of portfolios for those who have relied on fixed deposits for stability and steady income. The search for better returns combined with the anticipated rate cuts suggests that risk appetite may increase among investors. “With traditional safe havens offering diminishing yields, more investors might look towards equities and real estate. This transition could lead to heightened volatility in these markets as capital flows into riskier assets in the pursuit of higher returns,” says Rathi. 

Moreover, as private capital expenditure gains momentum due to lower interest rates, growth opportunities in various sectors may emerge, enticing both institutional and retail investors. “Real estate, in particular, could see renewed interest as borrowing costs decrease and consumer sentiment improves, potentially leading to upward price adjustments,” says Rathi.

What It Means For Borrowers 

If the RBI decides to lower the repo rate in its upcoming policy review, borrowing costs for banks will decrease. This reduction could be passed on to consumers in the form of lower home loan interest rates, making housing loans more affordable.

“However, it's important to note that while the liquidity injection sets the stage for potential rate cuts, the actual decision will depend on various factors, including inflation trends and overall economic conditions,” says Samanta. 

However, It's crucial to remember that even while liquidity has increased, the central bank has kept the repo rate at 6.5 per cent because of persistent inflation worries. “As a result, notable drops in borrowing costs might not happen right away but at the same time it suggests that RBI has got more confidence that inflation is trending down,” says Seth. Also, the inflation is still around five per cent. So if the RBI cuts rates it will be a bold move.