Will RBI cut repo rate or stay put on Friday? Here's how stock markets could react in either of the scenarios

The Reserve Bank of India (RBI) is set to hold its Monetary Policy Committee (MPC) meeting from December 3-5. While analysts remain divergent on their views of whether the Indian central bank will cut rates this time or not, market experts have estimated what the impact might be on Indian stock markets.
Earlier during its previous meeting, RBI decided to keep the benchmark repo rate unchanged at 5.5 percent on October 1 for the second time in a row. RBI’s MPC cut rates by a total 100 basis points in the first half of 2025, but maintained a pause since August.
After RBI Governor Sanjay Malhotra announced MPC’s decision on October 1, markets closed in the green. Sensex gained more than 700 points (around 0.9 percent) to close at 80,983.31, while Nifty 50 ended the session 225 points higher (over 0.9 percent) at 24,836 on October 1.
RBI rate cut expectations:
Earlier in November, Reserve Bank of India (RBI) Governor Sanjay Malhotra said there is scope to further reduce policy interest rates. "At the last MPC meeting in October, it was communicated clearly there is room to cut policy rates. Since then, the macro-economic data we have received has not indicated that the room to lower rates has decreased," he said during an interview with Zee Business.
“There is certainly room (to lower rates) but whether the MPC takes a call on that in the coming meeting or not, depends on the committee,” he added, spurring rate cut hopes briefly. Analysts began to anticipate a 25-basis point rate cut following the Governor’s comments.
The RBI was expected to cut rates by 25 basis points to 5.25 percent on December 5, according to a Reuters poll.
However, government data later showed that Indian economy grew at a six-quarter high of 8.2 percent in Q2 FY26, thus beating estimates. This was helped by robust manufacturing and a buoyant services sector, especially financial, real estate and professional services.
The strong GDP growth has reduced rate cut hopes slightly. Anirudh Garg, Partner and Fund Manager at INVasset PMS, noted that a strong GDP print reduces pressure on monetary policy to accelerate easing.
The MPC faces a challenging act at the December rate review, with the mix of a strong growth print and record low inflation, said Radhika Rao, Executive Director and Senior Economist at DBS Bank. “We expect an emphasis on forward looking growth guidance and high real rate buffer due to weak inflation, to justify a move to lower rates further,” she added.
Let’s take different scenarios of RBI's MPC decision and how markets can react to each of them:
What if RBI delivers a rate cut:
If the RBI decides to cut rates in the upcoming MPC meeting, it would act as a strong short-term catalyst for Indian equities, Garg said. "A rate cut reduces borrowing costs for corporates and consumers alike, stimulating credit growth, improving earnings visibility, and boosting liquidity in the system. Historically, such easing phases have led to renewed risk appetite among investors, particularly benefiting rate-sensitive sectors like real estate, autos, and financials," he added.
Garg noted that the impact will specifically be positive for banking stocks, as loan demand rises as credit becomes cheaper, leading to stronger balance-sheet growth. “However, banks could see marginal compression in net interest margins (NIMs) if lending rates adjust faster than deposit costs. Despite that, in an environment of stable asset quality and robust loan growth, the impact on profitability tends to be limited, and valuations remain well-supported,” the analyst said.
Siddharth Maurya, Founder & Managing Director at Vibhavangal Anukulakara, said that a rate cut by the RBI could usher in a fresh leg of upside for Indian equities, as cheaper credit, stronger corporate margins, and renewed investor appetite drive the markets higher.
Ravi Singh, Chief Research Officer at Master Capital Services, said that a 25 basis points cut would align well with the government’s broader economic agenda and would complement other positives initiatives like GST rationalisation, capital expenditure, and ongoing incentive-led domestic manufacturing.
“Such a move should lift positive sentiment across rate-sensitive sectors while giving a push to overall economic activity, making it a favourable outcome for equity markets,” he said.
A surprise 50 bps cut meanwhile would be interpreted as an aggressive push by the RBI to energise domestic demand and overall activity, potentially triggering a strong rally in equity market, the analyst said. “Ultimately, the market’s reaction will not just hinge on the RBI action but, also on the tone and forward guidance accompanying the decision,” he added.
A rate cut by the RBI would likely be read as a strong pro-growth signal, especially coming on the back of robust GDP numbers and sharply softer inflation, said Anil Rego, Founder and Fund Manager at Right Horizons. "A reduction in borrowing costs typically boosts risk appetite, and markets could respond with a broad-based rally led by rate-sensitive sectors such as banking, autos, real estate and consumer durables," he said.
"Lower yields would make equities relatively more attractive, potentially triggering renewed FPI inflows after months of cautious foreign positioning. A shift toward easier policy would also ease financial conditions for corporates, support credit growth and strengthen expectations of an extended domestic capex cycle. With liquidity improving and confidence rising in India’s medium-term growth path, markets may treat a rate cut as validation that the RBI is comfortable nurturing the next leg of the economic expansion," he added.
"If the RBI delivers a 25–50 bps rate cut, markets should respond positively as lower borrowing costs support credit demand and improve earnings visibility. A 25 bps cut would offer a mild boost, while a 50 bps move would act as a stronger catalyst for cyclicals and broader equities. For banks, cuts may temporarily compress margins, especially for PSU lenders, but stronger loan growth and fee income typically offset this," said Ajit Mishra – SVP, Research, Religare Broking Ltd.
"If the MPC is proactive and increases the rate, it will help signal growth focus and also help reduce the cost of funding, which is a positive given that private spending is picking up," said Shravan Shetty, Managing Director, Primus Partners. "Any rate drop will also help banks as they navigate the margin squeeze. This, together with other liquidity measures, will help banks fund capex growth and improve margins," he added.
InCred Money Team said that a rate cut ould trigger a short-term rally, as lower borrowing costs usually boost consumer spending and lift overall demand across the economy.
What if RBI holds rates:
Markets are unlikely to react negatively in case the Indian central bank decided to hold rates this time, Garg said. He noted that a pause would signal confidence in the growth trajectory and help banks maintain healthy spreads. “Overall, either scenario points to continued market resilience — with a rate cut offering a short-term boost and a hold ensuring stability,” Garg said.
Anil Rego also noted that markets are unlikely to interpret a no-rate cut decision negatively, as policy continuity could be seen as a sign of prudence rather than hesitation. "A pause would signal the central bank’s intent to assess the impact of previous easing and ensure inflation remains firmly anchored before committing to further action. In this scenario, equities may trade in a narrow range but remain supported by strong GDP data, resilient earnings and improving domestic flows," he said.
Singh meanwhile said that if the RBI decides to hold rate and delay rate cut, markets will largely read it as the central bank’s attempt to assess incoming data more carefully, which will still be viewed as a responsible, stability-first stance.
“In case of a hold by the MPC, consolidation with pockets of opportunity could be expected with high-quality companies with stable cash flows attracting premium valuation and speculation-driven stocks underperforming. In short, rate cuts trigger a broad rally while a hold would make markets selective,” said Maurya.
"If the RBI holds rates, the market may view it as a signal of caution, resulting in a more muted reaction. Banking stocks would see stable margins but slightly softer growth expectations until clearer guidance emerges," said Ajit Mishra from Religare Broking.
"If the RBI does hold rates, investors are unlikely to view it negatively. On the contrary, such a decision would probably be seen as a prudent balancing act, acknowledging strong growth while guarding against inflation upside. In that scenario, markets will likely shift their focus from the near-term rate decision to the broader trajectory: when the rate-cut cycle might actually begin, and how quickly those cuts feed through to banks, businesses, and borrowers," said InCred Money Team.
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