RBI’s rate pause isn’t a pivot yet, says Quantace’s Karthick Jonagadla

The Reserve Bank of India’s decision to hold interest rates steady at 5.5% signals a pause, not a pivot to rate cuts, said Karthick Jonagadla, MD and CEO of Quantace Research and Capital Pvt Ltd, in a live discussion with The Federal on Thursday.

“The RBI has just paused. It’s not a pivot. They’ll only cut rates if growth weakens or if inflation drops closer to 4.5%,” Jonagadla told The Federal. “Right now, the 1% worth of cumulative rate cuts earlier this year is still working its way through the system.”

To clarify, the repo rate, currently at 5.5%, is the benchmark interest rate at which the RBI lends money to commercial banks. This influences how cheap or expensive loans become for ordinary consumers and businesses. A lower repo rate usually translates into cheaper loans, spurring demand, while a higher rate cools borrowing to curb inflation.

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Despite the pause, Jonagadla said the central bank is unlikely to consider fresh cuts unless headline inflation, the rate at which prices of essential goods and services rise, falls below 4% and there is “clear growth damage from tariffs” before December.

“Core inflation, which strips out food and fuel to show longer-term price trends, is still above 4%, largely due to high gold prices. That limits the RBI’s room to ease further,” he said.

He added that lending rates could still fall naturally, without any new RBI action, because some banks’ funding costs are still higher than average loan rates. “So the transmission of earlier rate cuts is still happening,” he explained.

Inflation illusion: Why June drop won’t last

In a detailed research note published by Quantace Research just a day before the policy decision, Jonagadla had already anticipated many of these moves and market implications.

According to the note, the collapse of headline inflation to 2.1% in June is unlikely to last. The RBI expects inflation to rebound to 4.2% by the fourth quarter of FY2026 as “base effects fade and food prices normalise.” This essentially means that the sharp drop in inflation was helped by comparisons to last year’s high numbers and that effect will wear off soon.

Because of this, bond yields, which move inversely to bond prices and are closely tied to inflation expectations, are unlikely to fall further. “Any backup in the 10-year G-Sec (government security) yield would stall the rich discount-rate narrative that has powered premium defensives and REIT-style proxies,” Jonagadla noted. (Discount-rate narrative refers to the idea that lower interest rates boost the value of future cash flows, benefitting certain stock types like real estate investment trusts and consumer staples.)

He also pointed out that high gold prices, which make up just 2.3% of the consumer price index (CPI) basket, have disproportionately skewed core inflation upwards, contributing to about 21% of the April core CPI number.

Market implications: Who wins, who loses

While the pause may not thrill rate-cut hopefuls, Jonagadla sees a silver lining in stronger-than-expected domestic demand and rural recovery. These are likely to support economic growth even in the face of global headwinds, including a renewed wave of US tariffs under Donald Trump.

Quantace’s note pegs India’s real GDP growth at a steady 6.5% for FY2026. Sectors expected to benefit include banking, capital goods, and building materials, essentially industries that benefit from real loan growth and infrastructure spending.

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On the flip side, rate-sensitive plays such as office REITs, consumer staples, and healthcare, often seen as safe havens, could lose their appeal as the bond market stabilises. “Rotate out of high-P/E yield substitutes,” Jonagadla advised, referring to pricey stocks whose dividends act like bond yields. “Their cash-flow durability no longer offsets duration risk,” he said, meaning these stocks are more vulnerable if interest rates stay high for long.

Investor strategy: Caution plus cyclicals

Jonagadla recommends that investors stay “overweight” (financial jargon for putting more money) in cyclical sectors such as housing finance and auto loans, where prior rate cuts are still providing a boost.

Within consumption, he advises backing brands with genuine pricing power, companies that can raise prices without losing customers, in case inflation heats up again.

Finally, he cautions against reacting too quickly to geopolitical shocks such as the Trump tariffs. “Keep a defensive hedge via India-centric revenue streams until the tariff fog clears,” he advises.