It appears to be certain that the US Fed will start cutting interest rates from next week. The rate cuts have acted as a precursor for emerging markets to ease their monetary policies. However, cues from the honourable RBI governor suggest otherwise regarding India’s stance. The latest inflation data highlights that it might have just veered off course. Food prices contribute the highest to inflation now. Although the current numbers are within the RBI’s target of 4%, the central bank will tread with caution and might keep the rates unchanged.

The governor stated, “Inflation has moderated from its peak of 7.8% from 2022 into a tolerance band of +/-2 per cent around the 4 per cent mark. But there is still some distance to be covered and we can’t afford to look the other way”. RBI projections indicate inflation numbers cooling from 5.4% in FY23-24 to 4.5% in FY 24-25 and 4.1% in FY 25-26. The current rates are steady at 6.5% and are unchanged since June 2023. There are mixed interpretations regarding the scenarios that might unfold after rate cuts. A rate cut by the Fed without rate cuts by RBI will appreciate the INR which will dent the growth of IT, Pharma & other export-centric sectors – whereas a rate cut by RBI will put pressure on bank net earnings.

There have also been concerns about high commercial real estate loan exposure in the bank loan books. Large CRE exposures will make banks vulnerable to liquidity constraints making them a ripe target for short sellers. Concerns also loom over the multifold growth of private credit. The RBI is concerned over the interconnectedness of Private Credit with the Banks and the entrenchment of this asset class as a major funding source for mid-sized corporate firms with low or negative earnings and high leverages. The Banking sector contributes 34.5% weightage to the Nifty50 index. Any targeted short-selling of banking stocks will lead to a subsequent market correction.