RBI policy preview: What investors should watch

The Reserve Bank of India’s (RBI) April 2025 policy update comes amid evolving global and domestic economic conditions. While global trade tensions have escalated following recent US tariff hikes, India has seen a sharper-than-expected decline in inflation. In this context, the RBI’s latest policy decisions are likely to influence market expectations and investment strategies over the coming months.

Key announcements from the April 2025 policy

At its first Monetary Policy Committee (MPC) meeting of FY26, the Reserve Bank of India (RBI) reduced the repo rate by 25 basis points, bringing it down to 6%. This is the second consecutive meeting with a 25 bps cut. It also marks the first instance of back-to-back rate cuts in five years, which indicates a noticeable shift in the RBI's efforts to support economic growth in an uncertain global economy.

The MPC did change its policy stance from "neutral" to "accommodative". By shifting to an "accommodative" stance, the RBI clearly indicated it is willing to further lower the repo rate if economic conditions require it.

The RBI continues to predict real GDP growth for FY26 at 6.5%. This is slightly lower than earlier estimates. It also maintains its inflation projection at around 4%, assuming a favourable monsoon and continued moderation in food and crude oil prices.

Why this policy cycle matters for you

The RBI’s decisions are being shaped by an increasingly volatile global environment. The US’s imposition of tariffs on Indian imports has introduced new headwinds for exports and overall economic growth. This, combined with a fluctuating US dollar, falling crude prices, and softening bond yields, has resulted in correction in global equity markets and increased uncertainty for emerging economies such as India.

What should investors like you keep a watch on?

1. Interest rate trajectory and fixed income strategies

The RBI’s shift to an accommodative stance and the back-to-back rate cuts suggest that the rate easing cycle may continue, especially if inflation stays contained. Many expect another 50-75 basis points of cuts through FY26, potentially bringing the repo rate down to 5-5.25% by the end of the fiscal year.

What this means for you

• Bond investors: Falling interest rates generally boost the prices of existing bonds, especially those with longer durations. Gilt funds and duration-focused debt funds could see capital appreciation as yields decline further.

• Fixed Deposit (FD) holders: Expect FD rates to trend downward, particularly for short and medium-term tenures. If you rely on FDs for income, consider locking in current rates or exploring alternatives like corporate bonds, tax-free bonds, or government-backed schemes such as Public Provident Fund (PPF).

• Tactical moves: If you have surplus liquidity, money market or ultra-short bond funds may offer better risk-adjusted returns than renewing short-term FDs in a falling rate environment.

2. Equity markets

The rate cut is a double-edged sword for equities.

• Banking stocks: While cheaper funding costs are positive for borrowers, banks, especially public sector ones, face margin pressure as lending rates fall faster than deposit rates. This has already led to a sharp sell-off in banking stocks, with banking indices dropping notably on policy day.

• Rate-sensitive sectors: Real estate, auto, and consumer durables stand to benefit as lower Equated Monthly Instalments (EMIs) and borrowing costs spur demand for homes, vehicles, and big-ticket items. Developers and homebuyers alike could find more breathing room, while auto sales may get a much-needed boost.

• Exporters: The new US tariffs create uncertainty for export-oriented sectors, though some suggest Indian exporters may find opportunities as global supply chains adjust.

3. Borrowers

If you have floating rate home, auto, or personal loans, you could see your EMIs drop as banks pass on the benefit of lower repo rates. Even a 0.25% reduction can save you thousands of rupees annually. However, the speed and extent of transmission will vary by bank and loan product.

4. Savers and retirees

Lower policy rates mean banks are likely to reduce deposit rates further. This is a challenge for risk-averse investors and retirees who depend on FDs for stable income. Already, some banks have pre-emptively cut FD rates, and more are expected to follow suit. Consider diversifying into short-term debt funds, laddering FDs, or using government-backed products to maintain cash flow stability.

Risks and uncertainties to monitor

• Global trade policy: The full impact of US tariffs on Indian exports and overall economic growth remains uncertain. Further escalation could dampen sentiment and slow recovery.

• Monsoon and food inflation: While the RBI’s inflation outlook is predicated on a favourable monsoon, any adverse weather event could push food prices higher, narrowing the central bank’s room to cut rates further.

• Market volatility: Equity markets remain sensitive to global cues, especially from the US and China. Investors should brace for continued volatility, particularly in banking and export-heavy sectors.

Actionable takeaways for investors

• Rebalance your portfolio: With rates set to trend lower, consider increasing allocation to longer-duration bond funds and reducing exposure to short-term FDs.

• Lock in FD rates: If you rely on fixed deposits, lock in higher rates now before banks cut further.

• Focus on quality in equities: Prioritise fundamentally strong companies in rate-sensitive sectors like real estate and autos but be cautious with banks facing margin pressure.

• Monitor policy signals: Stay alert for further rate cuts and liquidity measures, as these will influence both debt and equity returns through the rest of 2025.

Conclusion

This RBI policy cycle is not just another routine adjustment—it’s a strategic response to a world in flux. For you as an investor, the key is to stay agile and proactive. The central bank’s willingness to cut rates and maintain ample liquidity indicate a continued focus on supporting growth, but it also means you must adapt to a lower-yield environment. Whether you’re locking in FD rates, repositioning your bond portfolio, or seeking opportunities in equities, it’s essential to stay informed and responsive.