Street sees no major surprise in RBI's interest rate pause decision

Realty stocks could see more gains while banking and NBFCs may witness a relief rally

The Reserve Bank of India’s (RBI’s) Monetary Policy surprised most commentators who were expecting a 25 basis points (bps) hike. However, while the MPC unanimously voted to hit pause on the rate hikes, it will also continue to tighten money supply in “withdrawal of accommodation”. 

The central bank lowered its inflation projections for the fourth quarter of the 2023-24 financial year (Q4FY24) by 40 bps while also lowering its Q1FY24 inflation expectations by 10 bps. The MPC dropped its FY24 CPI inflation forecast to 5.2 per cent (from 5.3 per cent previously), on the basis of moderating crude prices. 

It also raised its GDP growth projection for FY24 to 6.5 per cent, by a modest 10 bps. The RBI statement said that Q4 signals were positive with higher rabi production brightening agro prospects, and hence indicative of positive rural demand, as well as continued resilience in urban demand. 

Breaking it down, Q1FY24 is expected to see strong growth acceleration (unchanged expectations at 7.8 per cent of GDP) on base effects, with a gradual fading of the growth momentum in Q3FY24 and Q4FY24. However, the RBI remains far more optimistic than the consensus when it comes to growth. Most analysts expect growth will be around 6 per cent of GDP for FY24. 

The big question for traders: Is this a pause with another hike in store? Or is it the end of a cycle? Opinions are divided. Risks could emerge from global events, weather disruptions with an El Niño prediction which hits agriculture, etc. 

While economists and analysts were surprised, the market traded flat, which suggests that some with the big money were not. The Q1FY24 projection of 7.8 per cent GDP growth remains unchanged and this would imply expectations of a strong gain in earnings.

The RBI also needs to manage the Centre’s borrowing via the bond market at the lowest possible yields, which may have been a consideration in holding rates. It also has responsibility for the stability of the rupee which must stay in an acceptable range. Reserves fell from a record $641 billion in September 2021 to a low of $524 billion in October 2022 before recovering to $579 billion in March 2023. The rupee has gained by about 0.5 versus the dollar in the last two weeks. The IT sector reacted slightly in the negative on the Policy but the price change was not significant. 

Sectors like banking and non banking financial companies (NBFC) may be looking at a relief rally if the consensus is that growth will continue and interest rates have peaked. The debt mutual fund segment could also see a relief rally. However, there was practically no movement in either the banking or NBFC sector, with very small gains to the Bank Nifty and the Nifty Financial Services indices. 

The biggest gainer in banking was AU Small Finance while Axis Bank and ICICI Bank lost ground. In the financial services segment, the big winner was IEX which is not very rate sensitive but driven by expectations of high merchant power demand. 

Two rate-sensitive sectors did however see gains. Automobiles saw some buying and the real estate sector saw a 2.84 per cent surge with practically every listed realty stock gaining ground. Technically, realty looks like an interesting bet with Godrej, Oberoi and DLF looking capable of further gains.