Lowering India’s interest rates for the first time in the last 57 months, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on Friday unanimously cut the repo rate by 25 basis points (bps) to 6.25%, to support fading growth in the hope of inflation easing to 4.4% in this quarter and 4.2% through 2025-26.
Impact on the Indian Economy
- Cheaper Loans & Increased Borrowing:
- Banks get funds at a lower cost, encouraging them to lower lending rates.
- This boosts consumer spending on housing, automobiles, and other big-ticket items.
- Boost to Economic Growth:
- Lower interest rates make borrowing cheaper for businesses, helping them expand and invest.
- More investments lead to higher GDP growth over time.
- Rise in Inflationary Pressure:
- Lower interest rates may increase demand, leading to higher prices and inflation in the long run.
- RBI monitors inflation while adjusting rates.
- Weaker Rupee & Foreign Investment Impact:
- Lower interest rates make Indian bonds less attractive for foreign investors.
- This may lead to capital outflows and slight depreciation of the Indian Rupee (INR).
Impact on the Indian Stock Market
- Rally in Interest-Rate Sensitive Sectors:
- Banking, Auto, Real Estate, and Infrastructure stocks tend to rise as demand for loans increases.
- NBFCs (Non-Banking Financial Companies) also benefit from lower borrowing costs.
- Stock Market Liquidity Increases:
- Lower rates push investors to move money from fixed deposits and bonds into stocks for better returns.
- This can drive indices like Sensex and Nifty higher.
- Boost for Corporate Profits & Valuations:
- Companies with high debt (capital-intensive businesses) benefit as interest payments reduce.
- Higher earnings potential leads to better stock valuations.
- Foreign Investors’ Response:
- If inflation remains under control, Foreign Institutional Investors (FIIs) may continue investing in equities.
- However, if the rupee weakens significantly, FIIs might withdraw capital, impacting market performance.
A repo rate cut of 25 bps is generally positive for economic growth and bullish for the stock market, especially for interest-rate-sensitive sectors. However, inflation and currency movement will determine the long-term impact.
