While JM Financial said that the MPC’s statement would be crucial regardless of whether it maintains the present position or indicates future easing, a note by Nuvama stated that the RBI may first assess the effect of GST rationalization on consumption before proposing a rate decrease.
During the next Monetary Policy Committee (MPC) review, the central bank is pricing in a status quo for the stock markets; but, the Reserve Bank’s remarks on inflation, the rupee, system liquidity, and economic prospects may have an impact on market sentiment.
Here is a brief summary of the MPC components that might affect how the equities market responds to the policy details.
Stance and Policy Rate
What to anticipate: According to Moneycontrol’s survey of economists, treasury chiefs, and fund managers, the majority of experts predict a neutral position, and markets generally anticipate the repo rate to stay at 5.50%.
JM Financial said that the MPC’s remark would be crucial regardless of whether it upholds the existing position or suggests future easing, while Nuvama Research stated that the RBI may first assess the effect of GST rationalization on consumption before contemplating a rate decrease.
According to Barclays, the RBI MPC may lower the policy repo rate by 25 basis points after a break in August. “Comfort over inflation, which permits more monetary easing, is the foundation of our base case for an October decrease.
Another reason for a forward-thinking central bank to lower rates is the recent tightening of financial conditions and the tariff overhang that is obscuring the GDP picture for the next 12 months. According to the research, “the transmission of policy easing to financial markets and bank lending rates is also being hampered by the tightening of financial conditions.”
Why It Is Important Policy stability anchors investor expectations and lowers market volatility by communicating the RBI’s delicate balancing act between economic goals and inflation management. Any modifications to the policy rate, however, would affect the stock and bond markets.
Forecast for Inflation
What to Expect: It is anticipated that the rationalization of the GST would reduce headline inflation, with the FY26 CPI dropping below 3%. According to experts, this will result in a change of inflation projections for the next quarters. JM Financial said that while the rationalization of the GST lowers CPI liabilities, the inflation trend is still upward-sloping, which makes the RBI’s tone throughout the policy crucial. Nuvama has warned that slower government spending and tariff headwinds may offset the advantages of reduced inflation.
Why It Matters: Expectations of inflation impact real interest rates and monetary policy, which in turn affects consumer spending, business profitability, and stock values.
Management of Currency
What to anticipate: Concerns about tariffs and the cost of an H-1B visa have put pressure on the rupee, which has been trading close to record lows.
The RBI’s choice to step in or let market forces take control might have a big impact on the mood of the forex market if the currency is close to record lows, according to Sunny Agarwal, Head of Fundamental Equity Research at SBI Securities. While JM Financial said that the central bank’s recent actions to support the rupee highlight the significance of stabilizing markets, Nuvama stated that continuous capital outflows may force the RBI to put currency stability ahead of rate reductions.
Why It Matters: While a stable rupee lowers uncertainty for exporters, importers, and investors, currency volatility affects import costs, corporate profitability, and FII flows.
Forward Rate Guidance
Investors will be paying particular attention to the MPC’s statement over the medium-term course of policy. Even while inflation is mostly under control, the declining value of the rupee may function as a barrier to rate decreases, therefore the RBI’s advice is essential, according to Sunny Agarwal of SBI Securities. Nuvama said it anticipates eventual monetary easing, while the timing remains critical, and JM Financial feels a dovish tone is required to enable successful transmission of previous policy actions via the bond market channel.
Why It Is Important By lowering uncertainty and improving policy efficacy, forward guidance assists markets in anticipating changes in policy, which affects yield curves, credit flows, and sector rotations.
Effects on the Market and Liquidity
What to Expect: Although a rate drop is improbable, there will not be any significant equity changes right away. According to SBI Securities, this MPC is essentially a non-event for stock markets since previous rate reductions and liquidity assistance have already aided in incremental loan expansion. According to JM Financial, government securities yields have somewhat stiffened, suggesting the weak transmission of previous reduction, although call rates are still within the policy range.
Why It Matters: While low volatility maintains investor confidence in rate-sensitive industries, enough liquidity in the banking system guarantees greater transmission of prior rate reduction and encourages investment and consumption.
Impact on Sectors and Flow
What to Expect: There may be market interest in certain industries if the policy remains unaltered. September vehicle sales figures and auto majors’ post-Navratri remarks will be widely monitored, according to SBI Securities. PSU banks might profit if reduced inflation lowers bond rates, which would increase treasury profits. In contrast, local policy has less of an impact on metals than global commodities trends. Given the unstable global geopolitical environment, Sunny Agarwal of SBI Securities said that the MPC is unlikely to take action before to the transmission of previous cuts, suggesting a wait-and-watch period on October 1.
Why It Is Important Strategy allocation is based on sectoral sensitivity to global trends, liquidity, and policy. Investors may minimize risk and spot possibilities by knowing which sectors could respond.