RBI’s liquidity boost to recharge the markets

Indian markets are likely to witness fresh momentum this week, supported by positive sentiment following Reserve Bank of India’s (RBI’s) double liquidity booster with a jumbo 50 bps rate cut (vs. the largely anticipated 25 bps) and a massive 100 bps CRR cut. Further, there is optimism surrounding a potential trade agreement with the US, following India’s recent meeting with American officials in New Delhi. Sectoral action would continue with strong momentum expected in rate-sensitive sectors like banks, financials, realty and auto after RBI’s surprise liquidity boost. However, global headwinds including unexpected shifts in US tariffs and ongoing geopolitical tensions may induce volatility. Key macroeconomic data to watch out for this week includes May retail inflation (CPI) figures from US, China and India and Q1 GDP of Japan.

The RBI monetary policy committee front-loaded the monetary easing cycle as it announced a higher than expected 50 bps cut (third in a row in 2025), while changing the stance to 'neutral' from 'accommodative' given global growth challenges. RBI also announced a 100-bps cut in cash reserve ratio (CRR), spread across four tranches, to infuse liquidity in the system. 

The announcement triggered a sharp rally in banking and financial stocks with Nifty Bank (+1%)and Nifty Financial Services (+1%) indices hitting all-time high levels of 56,693 and 26,921 respectively. FY26 Inflation was revised downward to 3.7% from 4%, while GDP growth for the period remained unchanged at 6.5%. RBI’s reversal of its previous dovish stance indicates limited scope for further rate cuts in the near term.

Last week, Nifty50 reclaimed the 25k mark, ending with gains of 1% at 25,003. Broader market sharply outperformed with Nifty Midcap100 and Smallcap100 rising 2.8% and 3.9% respectively on sustained buying interest, especially in the small-cap segment. Nifty Realty was the top sectoral gainer, rising by 9.4%; while other rate sensitive sectors including banks, financial services and auto rose between 1-2% each. Defence and railway stocks were in momentum, driven by a surge in government orders. Additionally, capital market stocks were in favour on the back of improved liquidity, rising retail investor participation, renewed FII inflows and growing optimism around domestic equities.

Global cues continue to remain mixed, with US announcing tariff hike on steel and aluminium imports from 25% to 50%. Meanwhile, US pressured its trading partners to provide their best offers in trade negotiations ahead of an impending tariff deadline. There was some progress on US-China trade front.

In a significant development, Indian government’s capital spending surged to the highest-ever monthly level of Rs 2.4 lakh crore in March 2025 (68% YoY), compared with Rs 1.4 lakh crore in March 2024. A closer look at the allocation of capex suggests positive growth for sectors like infrastructure, defence, railways and telecom.  

Automotive demand in May remained subdued in most segments except tractors. Export momentum and SUV demand cushioned the impact of sluggish sales in the passenger vehicle segment. 

India Inc.’s Q4FY25 earnings concluded better than expectations with Nifty delivering a 3% YoY PAT growth (vs. our est. of +2%), driven by widespread performance across sectors. Metals, OMCs, PSU banks, automobiles, healthcare, technology, and capital goods fuelled this healthy performance. Conversely, oil & gas (ex-OMCs) and private banks dragged overall profitability. While near-term challenges such as global macros, trade tariffs, and mixed corporate earnings could keep the market range-bound, we believe that the medium-to-long-term growth narrative for India remains intact.

The southwest monsoon made an early arrival in Kerala, eight days ahead of schedule, marking the earliest onset since 2009. This, together with the forecast of an above average monsoon this year is expected to boost monsoon-linked sectors such as fertilizers, agro-chemicals, rural finance, and auto (two-wheelers).