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The RBI stepped in with a 25bps repo rate cut and Rs1.45trn (0.55% of NDTL) liquidity infusion, driving a 6-10bps rally in short-end bonds. This addresses stress in long-term bonds and domestic liquidity, and is consequently a positive for equities. We remain constructive on Indian equities: the best way to play this is through NBFCs, SMID banks, and autos.

RBI MPC – Steps in decisively

The RBI delivered a big positive for the markets. The MPC unanimously cut rates by 25bps, with the consensus wavering on this issue after the strong 2QFY26 GDP print. More importantly, it delivered a Rs1.45trn liquidity injection via OMOs (Rs1trn) and a USD/INR swap (USD5bn/Rs450bn) to address transmission issues.

Short-end rally in bonds

Bonds rallied at the short end with sub-5Y bond yields dropping by 6-9bps (vs a 2-3bps in the longer tenor buckets; refer to Exhibit 2). This is positive for the entire financial sector, though NBFCs and SMID banks are likely to see front-ended benefits through lower cost of deposits/borrowings. Large banks face some short-term pain because of the upfront impact on floating rate loans. We expect the yield curve to remain steep, given the pressures on the fiscal deficit of both, states and the Centre: revenues are under pressure from the GST cuts and low nominal GDP growth while welfare spending limits the ability to contain expenditure.

Credit growth recovery on track

Credit growth has been running marginally ahead of our estimates (11.3% as on 14-Nov-25 vs Emkay estimate at 11%). RBI measures should address worries about rising LDRs, and we see banks comfortably placed on deposits to fund this growth. We believe growth will be primarily driven by the retail segment, aided by a revival in consumption demand and RBI deregulation. We expect further improvement in credit growth to 13.3% in FY27. 

Short-term relief – Trade deal remains crucial

RBI measures should provide short-term relief and improve overall financial stability, by injecting liquidity and supporting the bond market. However, the underlying stress from a widening CAD is still an issue (see Exhibit 4) and the India-US trade deal remains crucial for resolving this. Unfortunately, there is little visibility on the progress of that deal – we are confident that it will be completed, albeit are unsure of the timeline.

Constructive on Indian equities

We remain constructive on Indian equities, with the caveat that CAD pressures could lead to periodic selloffs. Underlying trends remain resilient – we expect a consumption-led recovery in the economy, driving a strong earnings recovery from 2HFY26. Our preferred sectors are Consumer discretionary, Healthcare, and Materials. Key themes that we like are Internet, EMS, Aviation, and SMID banks. The best way to play today’s RBI action is through:

1) NBFCs – this should drive further improvement to CoF, and the exposure to floating-rate loans is more limited than banks. We are playing this through Bajaj Finserv and Shriram Finance.

2) SMID banks – the recent capital infusion by foreign banks and PEs give these banks a much-needed capital infusion and the comfort of an anchor shareholder. Monetary easing also helps their liabilities franchise disproportionately (see Exhibit 6). We play this via IDFC Bank, which is best positioned to ride the near-term loan growth recovery momentum.

3) Autos – the combination of GST cuts and easier financing should drive a strong growth recovery. We see an extended cycle in auto sales; auto remains one of our favorite sectors. Top picks are Maruti and TVS.

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