MPC Maintains Cautious Stance Amid Global Uncertainty; Liquidity Support Seen Boosting Equities, Capping Yields
Dr. Esha Khanna, Assitant Profressor at School of Economics NMIMS University
The Monetary Policy Committee’s (MPC) current stance and cautious approach is as anticipated and commendable, even in light of reduced retail inflation, resilient domestic growth, and a downward adjustment of future inflation forecasts. Nevertheless, the infusion of liquidity, volatile price conditions, and the emergence of mixed signals from high-frequency indicators, coupled with ongoing global uncertainties stemming from recent trade policy changes and new tariffs, have exacerbated existing geopolitical tensions. This situation is expected to adversely affect the manufacturing sector, while the mining sector is already experiencing challenges due to the early arrival of the monsoon, which poses risks to the domestic growth outlook. The transmission of the previously implemented frontloaded repo rate cut and the phased reduction in the Cash Reserve Ratio (CRR) is still in progress, manifesting as lower lending rates that are essential for stimulating the real estate sector and further reviving urban consumption demand. This has had a direct effect on the External Benchmark Lending Rate (EBLR), and the necessary influence on the Marginal Cost of Funds based Lending Rate (MCLR) through deposit lending rates is also observable. The ongoing focus on additional measures, particularly concerning Variable Rate Reverse Repo (VRR) and Variable Rate Reverse Repo Rate (VRRR) auctions, has ensured that both systemic and durable liquidity remain within a comfortable range, among other factors. Overall, as global developments indicate a dampening effect on equity markets due to tariffs, and global currencies exhibit mixed trends with the Indian Rupee (INR) also depreciating, this status quo, along with additional liquidity, is expected to have potently positive influence on equity markets while keeping the effects on both long-term and short-term yields largely capped.