📰First Time in Five Years

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Welcome to the best way to stay up-to-date on India’s financial markets. Today, we break down the Reserve Bank of India’s rate cut—the first in five years.

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Market Update.

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RBI Cuts Rates For First Time in Five Years.

This morning, the RBI reduced its key repo rate by 25 basis points to 6.25 percent, marking its first rate cut in nearly five years. The decision was made unanimously by the six-member monetary policy committee.

Spooked: The markets had already priced in a 25 bps rate reduction ahead of the RBI’s announcement; expectations of a rate cut were all but solidified after the economy faltered to a 5.4 percent GDP growth annualized rate last quarter, resulting in revised FY2025 growth expectation to be just 6.4 percent, a significant fall from 8.2 percent in FY24. Several factors are driving this: falling corporate earnings, low wage growth, dampened private consumption, declining foreign and domestic investment, and extensive pressure on the banking system. Samosa Capital extensively covered declining deposits in banks, driving a decrease in lending markets, while the RBI also cracked down on shadow banks trying to fill the gap. To address this, the RBI's new liquidity measures included $7 billion (₹612.5 billion) in open-market operations, with an additional $11 billion (₹962.5 billion) forthcoming. A tightening banking liquidity crunch, combined with earnings downgrades and macroeconomic concerns, signaled an imminent rate cut, as businesses could no longer afford to expand.

Wait, wait, wait. Isn’t inflation still high? India’s latest CPI print, from December 2024, was 5.22 percent y-o-y, and core (ex-food and energy) was 3.6 percent. For context, the RBI wants to keep inflation below a 4 percent target, but have a +/-2 percent band. While the inflation rate is hardly ideal for a rate cut, it reveals how the RBI’s calculus of economic growth risks and inflation risks has changed from past meetings. 

Inflation is overrated...literally: On the bright side, India’s CPI prints tend to overreport inflation: food and beverages make up 54.2 percent of the CPI weighting, which has not been updated since 2011. This overweight is a relic of an older, poorer, India when food made up much more of the average consumer’s expenditure. The Statistics Ministry has considered reducing the weight of food overweight by 8 percentage points in the basket of goods. The primary issue with overweighting food is that its prices are highly driven by government quotas, finicky subsidies, and supply-side issues like rainfall during the monsoon season. As of most recent, food inflation was 8.4 percent in December, but no amount of rate hikes will bring that down. By overweighting food, the RBI is sacrificing economic growth for a performative policy to reduce food costs.

India’s policymakers are hesitant to cut the weight of food because it will largely be perceived as changing the goalposts rather than achieving the goal. Similar EMs like Indonesia have reweighted their baskets in the past to 25 percent food, beverages, and tobacco, and international organizations have pressured India to do the same, but policymakers remain paralyzed out of fears of public blowback. While India’s inflation is uncomfortably high, it is part of growing pains: China, during in the 1990s and 2000s growth cycle (where it often hit double-digit GDP growth) averaged closer to 4+ core inflation, higher than India’s current 3.4 percent.

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Macro

• The rupee expected to linger near an all-time low following RBI rate cuts. The 1-month 0non-deliverable forward indicated that the rupee will barely change from 87.5775 on Thursday and near the all-time low of 87.5825.

• Analysts suggest that the 25 bps rate cuts may not significantly boost non-banking finance companies (NBFCs). Markets have already factored in a 50 bps cut for the year meaning that further cuts would be needed to improve NBFC earnings through lower funding costs.

• India's forex reserves rose for the second consecutive week. The reserves increased by $1.1 billion (₹96.2 billion) in the reported week, after rising by $5.58 billion (₹488 billion) in the prior week due to the appreciation/depreciation of foreign assets held by the reserves.

• The RBI will allow trading in bond forwards, providing long-term investors like insurers with a new tool to hedge interest rate risk. This move follows strong demand for hedging instruments and could expand the existing $12 billion (₹1.05 trillion) market for bond forward rate agreements.

• India plans to release monthly unemployment figures, starting in April. Until now, the government only released quarterly unemployment figures for urban areas and combined annual data.

Equities

• About 500 Samsung workers in India's factory are holding a sit-in protest against the suspension of 3 employees. This marks the 2nd major labor dispute at the Sriperumbudur plant which accounts for the production of 1/5th of Samsung’s total India revenue.

• Kia is contesting a $14 million (Rs.1.2 billion) tax demand for wrongly using trade treaty exemptions. Kia is accused of using free trade agreements to claim lower tariffs on some electronic car part imports. They are also fighting a separate $155 million (Rs.13.6 billion) tax evasion notice.

• Indian automaker Mahindra & Mahindra reported a 19 percent rise in quarterly profit. This jump is driven by a 20 percent increase in the volume of SUV and tractor sales.

• LIC, India's top life insurance provider, expects to see a recovery in net premium income in the current quarter. LIC has slashed the cost for policy-holders to surrender policies before maturity, effective October, hurting insurers.

• Ola Electric expects motorcycles to power EV adoption in India. Ola’s founder expects to reach 20 percent market penetration for electric motorcycles in under 2 years.

• Oil India misses third-quarter profit expectations with net profit decreasing by 22.9 percent. Despite a rise in fuel consumption, lower selling prices outweighed buoyant demand driving a profit expectation miss.

• Honeywell India reports lackluster profit growth due to slowing demand. Despite a 3.3 percent year-over-year profit growth, Honeywell missed expectations because of slowing infrastructure demand due to sluggish economic growth.

Alts

• Train-makers such as India's Jupiter and Poland's (state-owned) PFR are ready to make an offer for Spanish train-maker Talgo. Both companies are readying public tender offers for all the shares of Talgo.

Policy

• India's central bank plans to delay a higher digital deposit buffer for banks. The implementation of a proposal that mandates lenders to set aside more funds for digitally-linked deposits will be deferred at least by a year to March 2026.

• India central bank governor cautions lenders against rising digital frauds. With increased frequency and rising concern about digital transaction fraud, India’s central bank plans to launch secure website domain names to curb such fraudulent practices.

• India's central bank plans to defer the implementation of 3 proposed crucial banking regulations. This move was made to give lenders ample time to prepare for the changes.

See you Monday.

Written by Yash Tibrewal. Edited by Shreyas Sinha.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.