India's Equities Seen Benefiting from Central Bank Rate Cuts

Indian fund managers are betting on bank and consumer stocks to benefit from the central bank's aggressive policy rate cuts, aiming to boost economic growth. Asset managers such as BlackRock, Aberdeen Group, and Smartsun Capital are aligning portfolios on expectations of improved bank profits and consumer earnings. The shift signals monetary policy is key to India's $5.4 trillion equity market, which has struggled this year due to corporate earnings and rich valuations.

Indian fund managers are aligning their portfolios to benefit from the Reserve Bank of India's (RBI) aggressive policy rate cuts, aiming to boost economic growth. Asset managers such as BlackRock Inc., Aberdeen Group Plc, and Smartsun Capital Pte. have started positioning their portfolios on expectations that the rate cuts will improve bank profits and consumer earnings. The shift signals that monetary policy is becoming a key driver of India's $5.4 trillion equity market, which has struggled this year due to concerns over corporate earnings and rich valuations [2].

The RBI cut its policy rate by a steeper-than-expected 50 basis points last month, shifted its policy stance to 'neutral', and stopped liquidity infusions. It then conducted a liquidity absorption operation on June 27 as overnight rates fell below its policy corridor. Despite a rising liquidity surplus, the RBI withdrew 1 trillion rupees ($11.7 billion) from the banking system on Friday through a seven-day variable rate reverse repo, rolling over an operation from last week. This move is likely to keep overnight interbank lending rates between the policy repo rate and the floor of the policy corridor, allowing some policy transmission [1].

Market participants are unsure whether the RBI wants to push overnight rates close to the policy rate or if it is comfortable with rates hovering near the standing deposit facility (SDF) rate. A spike in market rates could affect the transmission of rate cuts that have not been passed on to borrowers and impact economic growth. The weighted average call (WACR) and weighted average tri-party repo rates (WATR) dipped this week as India's liquidity surplus hit a three-year high at more than 4 trillion rupees [1].

The NSE Nifty 50 Index hit a fresh record on July 1 after gaining for four straight months, while the NSE Nifty India Consumption Index has advanced 16% since its March low, marginally outperforming the broader gauge. Upbeat first-quarter business updates by companies such as pizzamaker Jubilant Foodworks Ltd. and jeweler Kalyan Jewellers India Ltd. signal room for more gains [2].

Most of the credit for the rally goes to the Reserve Bank of India — it has injected more than $100 billion of liquidity into the market this year, and its 50 basis points interest-rate cut last month came as a surprise to the market. "RBI’s easing is helping bank stocks to outperform and other rate sensitives will also come around to participate in the rally," said Sumeet Rohra, a fund manager at Smartsun. "The easing lowers the cost of funds and boosts earnings per share and return on investment which overall leads to rerating of valuations" [2].

The macro backdrop for many sectors in India is "going to improve over the next 12 months" largely due to the central bank’s easing, said Prashant Periwal, a portfolio manager for emerging markets equities at BlackRock. "The more domestic sectors such as financials and discretionary consumption are likely to do better and that is how we kind of are positioning the portfolio" [2].

The Indian markets are expected to begin Thursday’s trade on a cautious note, tracking mixed global cues. On Wednesday, the NSE Nifty 50 shed 88 points or 0.35% to end at 25,453, while the BSE Sensex fell 288 points or 0.34%, closing at 83,410. As investors eye stock-specific action, several companies are making headlines due to regulatory developments, business updates, and earnings data [3].

References
[1] Reuters. (2025, July 4). India central bank's operations keep overnight rates within policy corridor. Retrieved from https://www.reuters.com/world/india/india-central-banks-operations-keep-overnight-rates-within-policy-corridor-2025-07-04/
[2] Bloomberg. (2025, July 7). Fund managers bet on bank consumer stocks after India rate cuts. Retrieved from https://www.bloomberg.com/news/articles/2025-07-07/fund-managers-bet-on-bank-consumer-stocks-after-india-rate-cuts
[3] Republic World. (2025, July 3). Stocks to watch today: SBI, Tata Power, Nykaa, Rites, Vedanta, Indian Bank among key movers on July 3. Retrieved from https://www.republicworld.com/business/stocks-to-watch-today-sbi-tata-power-nykaa-rites-vedanta-indian-bank-among-key-movers-on-july-3