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Informist, Friday, Dec. 5, 2025

 

By Anjana Therese Antony

 

MUMBAI – Unlike many monetary policy days in the past, Friday was a cheerier day for equity investors as the Reserve Bank of India reduced key interest rates and made positive revisions to its projections on economic growth and inflation. Even though RBI Governor Sanjay Malhotra said future rate action will be data-driven, the Street bet on the possibility of another rate cut.

 

"The favourable inflation outlook, which is below the RBI's comfort zone, alongside relatively lower GDP projections for the upcoming year than the previous fiscal (2025-26) and lower high-frequency leading indicators leave some space for additional rate cuts going ahead," Parijat Agrawal, head of fixed income at Union Asset Management Co., said. At a time when Indian equities are slowly becoming attractive again to investors after over a year of muted returns, the rate cut comes as an additional tailwind.

 

This is amid expectations of stronger corporate earnings growth, a pickup in consumption on the back of recent goods and services tax cuts, higher government capital expenditure, softer inflation, higher-than-expected economic growth, optimism that foreign investors will return to India in the upcoming months, and easing global crude oil prices. For context, crude oil prices fell to around $60 per barrel in November from over $81 per barrel in June, while the rupee broke the 90 per dollar mark for the first time this week.

 

A slowdown in earnings downgrades and normalisation of valuations has also driven the equity market back to its record high. Last week, the Nifty 50 hit a new record high of 26325.80 points after more than a year. On Friday, the index rose 0.6% to end at 26186.45 points after the RBI's monetary policy announcement.

 

The Nifty 50 is trading at 21.5 times one-year forward earnings, which is one standard deviation above the long-period average, according to BofA Securities. "... we see no room for valuation expansion beyond +1 SD (standard deviation) and believe Nifty (50) returns would be commensurate to its earnings growth," the brokerage said in a strategy report Wednesday.

 

The last year was unfavourable for bulls due to muted earnings growth, recurring selling pressure from foreign investors, US tariff concerns, and rupee depreciation, among others. For most of the year, the domestic market underperformed many global peers. What supported equities during this period were the persistent inflows from domestic investors. The recent boom in initial public offerings is another indication of rising optimism about the fundamentals of the domestic market, analysts said.

 

Now that interest rates in India have been reduced further by 25 basis points to 5.25%, capital-intensive and interest-rate-sensitive consumption segments are expected to benefit meaningfully from the softer rate regime, Nirav Karkera, head of research at wealth management and investment platform Fisdom, said. "On the consumption side, the convergence of improving affordability, supported by recent tax reforms, pay commission-driven income effects, and a strong propensity to spend, positions sectors like automobiles, housing, and discretionary consumption to respond favourably to lower borrowing costs," he said.

 

BEYOND BULLISH PICTURE

However, for all market experts the picture is not as colourful. A section of participants believes it is still too early to make aggressive bullish bets. One reason is the delay in a trade deal between the US and India, despite positive comments from leaders of both sides. Experts said it is difficult to predict the next leg of policies under US President Donald Trump, who has been going back and forth on tariff policies since February.

 

Another reason is the caution regarding the medium-term effectiveness of GST cuts, with some analysts saying they will watch demand trends in the remaining part of the current financial year before making any major changes to earnings estimates. Experts also said the growth in average income is not meaningful enough to drive demand.

 

All eyes will be on the US Federal Reserve's monetary policy announcement next week. The US central bank is widely expected to reduce rates by 25 bps. According to the CME FedWatch Tool, there is an 87% chance the Fed will lower rates by 25 bps, up from 62% a month ago.  End

 

US$1 = INR 89.98

 

Edited by Ashish Shirke

 

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