RBI’s Neutral Liquidity Stance and Its Impact on Indian Markets
The Reserve Bank of India (RBI) has shifted to a neutral liquidity stance, which is expected to ease liquidity concerns, according to a report by Jefferies, an investment banking and capital market firm. Jefferies noted that the change from a withdrawal to a neutral position should alleviate concerns. The growth rates between credit and deposit growth have now converged, compared to a peak gap of 400 basis points over the past year. This convergence, along with improved deposit growth and easier liquidity, is expected to support banks’ net interest margins.
Jefferies also reported that domestic equity inflows in India have averaged USD 7.5 billion monthly throughout 2024. From July to October, the monthly equity supply reached around USD 7 billion, contributing to a year-to-date total of USD 60 billion. These steady inflows have provided a strong cushion for the market. Domestic equity mutual funds’ net inflows peaked at Rs450 billion (USD 5.4 billion) in June and remained at Rs405 billion (USD 4.8 billion) in September.
In India, a market correction was observed, particularly in small to mid-cap stocks. The Nifty Index declined by 9.4% from its peak in late September, while the Nifty MidCap 100 Index and Nifty MidSmall Cap 400 Index dropped 10.2% and 9.7%, respectively, by late October. This correction coincided with the latest earnings season, which saw the largest wave of earnings downgrades since early 2020. Jefferies revised FY25 earnings estimates downward for 63% of the 121 companies reviewed, reflecting the highest downgrade rate in over three years.
Despite recent corrections and mixed earnings reports, the report suggests that with the RBI’s balanced liquidity stance and robust domestic equity inflows, market sentiment appears well-supported.
Doubts Revealed
RBI -: RBI stands for the Reserve Bank of India, which is the central bank of the country. It manages the money supply and interest rates to ensure economic stability.
Neutral Liquidity Stance -: A neutral liquidity stance means that the RBI is neither adding nor removing money from the banking system. This helps keep the money supply stable, making it easier for banks to lend money.
Jefferies -: Jefferies is a global investment bank that provides financial advice and services. They analyze economic trends and give insights on how these trends might affect markets.
Credit and Deposit Growth Rates -: Credit growth rate is how fast banks are giving out loans, while deposit growth rate is how fast people are putting money into banks. When these rates are similar, it means the banking system is balanced.
Net Interest Margins -: Net interest margin is the difference between the interest banks earn from loans and the interest they pay on deposits. A higher margin means banks are making more profit.
Domestic Equity Inflows -: Domestic equity inflows refer to the amount of money being invested in Indian stocks by people within the country. This helps the stock market grow and stay stable.
Market Correction -: A market correction is when stock prices fall after a period of rising prices. It’s a normal part of how markets work and helps prevent bubbles.
Earnings Downgrades -: Earnings downgrades happen when companies are expected to make less money than previously thought. This can affect their stock prices.