RBI liquidity stance matters more than rate cuts for markets, says Bajaj Finserv CIO

Nimesh Chandan, who oversees investments at Bajaj Finserv Asset Management, sat down to discuss what actually moves markets in the months ahead. The conversation kept circling back to a single insight: the Reserve Bank of India's approach to liquidity matters far more than whether it cuts rates by a quarter percentage point.

This distinction matters because it shapes how money flows through the financial system. A rate cut gets headlines. Liquidity management—the RBI's decisions about how much cash sits in the banking system—shapes the ground beneath those headlines. Chandan noted that while inflation has fallen low enough to give the RBI room to cut rates, growth remains resilient enough that there is no pressing need to do so. A 25-basis-point cut remains possible, but it will not be the force that drives long-term borrowing costs. Those yields respond more directly to government spending plans and the budget that arrives next year. What deserves the closer watch, he argued, is what the RBI does on the liquidity front. Last month's tightening—triggered by tax outflows and the central bank's efforts to stabilize the rupee through foreign exchange intervention—already raised expectations of RBI action. The immediate effects of liquidity moves ripple through short-end rates and funding conditions faster than a rate cut would.

On the equity side, Chandan painted a picture of sustained gains ahead. He rejected the notion that markets have exhausted their upside after this year's strong rally. India will grow faster in 2026, he said, and corporate earnings will accelerate alongside that growth. Consumption will be the engine. The Nifty index, in his view, still trades below what the underlying businesses are worth. Domestic conditions are strengthening—government support is there, crude oil prices remain manageable, inflation is low—and all of this feeds into rising consumer spending, which drives both GDP growth and profit margins. A potential trade agreement with the United States and European Union could open export doors. Lower interest rates and rising capacity utilization are setting the stage for companies to invest in new plants and equipment again.

Within equities, Chandan remains selective. He likes power and defence, but not indiscriminately. In power, the surge in domestic demand—from manufacturing expansion, data centres, and artificial intelligence adoption—continues to push investment across generation, transmission, and distribution. Transmission and distribution, along with power equipment makers, have years of growth ahead. In defence, India remains the world's largest arms importer, but the government's push toward self-reliance is reshaping the industry. The defence budget has grown at 8 to 9 percent annually over the past two decades, driven by regional security needs. The sector has delivered strong returns, but valuations have climbed in pockets. Investors need to pick carefully, backing companies that genuinely benefit from the shift toward domestic production.

On the flow of money into markets, Chandan expects systematic investment plans—the monthly contributions that millions of Indians make to mutual funds—to stay robust. Over the past year, India has weathered global turbulence because of strong domestic fundamentals and consistent inflows from domestic institutional investors that have steadied the market during volatile stretches. As people's discretionary income rises—helped by moves like the recent revision to goods and services tax—more of their incremental savings will likely flow into mutual funds through these systematic routes.

The information technology sector presents a different puzzle. Its recovery remains tethered to the US economic outlook, and it may take time before business sentiment improves for IT companies. The question now is how much of that downside has already been priced into current valuations. The market may have already anticipated and factored in some of these headwinds.

On the US Federal Reserve, Chandan drew on Fed Governor Jerome Powell's recent observation about driving in fog—when visibility is poor, you slow down. The prolonged government shutdown deprived the Fed of critical labour and inflation data for October and November, leaving policymakers navigating without clear sight lines. Yet the balance of recent speeches from Fed officials tilts toward a December rate cut, with labour market weakness emerging as a key concern. Markets now assign roughly an 80 percent probability to such a move, making it increasingly likely, though not certain.