RBI’s Rate Cut: Will Foreign Investors See India As A More Attractive Market?

The monetary policy committee (MPC), chaired by Sanjay Malhotra, unanimously agreed to cut the policy repo rate by 25 basis points to 6.25% following major tax incentives in Budget 2025.

The government's commitment to a developed India was made plain in Budget 2025, and the RBI has now endorsed this commitment by granting a repo rate drop, emphasising economic growth. The Reserve Bank of India made a reasoned choice to boost economic development while preserving stability when it decided to lower the repo rate by 25 basis points, to 6.25%.

The Indian stock markets have had a net selling tendency by Foreign Institutional Investors (FIIs) as of early February 2025. With a net outflow of Rs 3,549.95 crore as of February 6, 2025, FIIs were net sellers in the Indian stock market. Domestic Institutional Investors (DIIs), on the other hand, saw a net inflow of Rs 2,721.66 crore the same day, making them net buyers. FIIs took out about Rs 58,076 crore from Indian equities in January 2025. The FII withdrawals have been caused by a number of factors, including rising U.S. Treasury rates, a strengthening U.S. currency, and global geopolitical risks.

Since the Indian economy has undoubtedly been experiencing a significant downturn, as shown in Q2 and Q3 of FY25, the RBI's prompt participation to start the rate cut cycle will benefit the markets in the long run. Whether or if FIIs will gradually become Net Buyers in the upcoming months will depend on the RBI's remarks on inflation and the anticipated rate cut for FY26.

"India remains the fastest large growing economy and is expected to continue to grow at 6.7% in the coming year. Foreign investors buying in India definitely get a boost but it will come with a lag," said Vinit Bolinjkar, Head of Research, Ventura Securities.

According to A R Ramachandran, Independent Research Analyst, a timely intervention by RBI to initiate the rate cut cycle will be positive for the markets from a longer-term perspective as the Indian economy has surely been facing a considerable slowdown as has been observed in Q2 & Q3FY25. Sectors like Real estate, Infrastructure, Manufacturing, FMCG & Banking & housing finance will benefit tremendously from the interest rate cuts as they should boost consumption and thereby investor sentiment.

"The RBI commentary on inflation & the expected rate cuts for FY26 will determine if FIIs would slowly turn Net Buyers in the coming months as barring the private sector banks & large caps, the broader Indian markets still look slightly expensive in valuations as compared to their Asian counterparts," A R Ramachandran added.

The Reserve Bank of India's decision to cut the repo rate by 25 basis points to 6.25% signals a strategic move to stimulate economic growth while maintaining stability. With a healthy external account, balanced fiscal consolidation, and steady private spending, the domestic economy's foundations are still strong. In terms of the economy, the GDP is expected to grow by 6.7% in FY 2026. The central bank, meanwhile, kept its inflation prediction at 4.2%, estimating it to be 4.5% in Q1, 4.0% in Q2, and 3.8% in Q3.

"With luxury real estate continuing to thrive, driven by strong domestic demand and rising NRI investments, lower interest rates will further enhance affordability and confidence in the sector. This shift is also expected to encourage long-term capital inflows, strengthen forex reserves, and reinforce India's position as a resilient and attractive market. As the investment landscape evolves, this policy change provides a timely boost, ensuring sustained momentum in the premium real estate segment," stated Aditya Kushwaha, CEO, Axis Ecorp.

In line with the strengthening macroeconomic data, the Reserve Bank of India made a timely and planned choice by cutting the repo rate. The much-awaited rate cut is expected to quicken economic momentum since inflation is substantially under control and the FY26 budget's fiscal initiatives provide substantial support to the middle class.