How Repo Rate Cuts Affect Indian Stock Markets

Recently RBI (Reserve Bank of India) governor Sanjay Malhotra announced the second rate cut in the year on 9 April 2025. This is the first Rate cut on FY 2025-26 by projecting India’s forecasted GDP Growth at 6.5%. Let us Understand deeper about how rate cuts relate to markets how they affect markets and investors and the pros and cons of it.

What Are Repo Rate Cuts?

RBI is the big boss of all banks in India. It regulates all banks and financial institutions and controls monetary stability in India. It also controls the interest banks pay when they borrow money from it.

This interest rate is called the repo rate. A rate cut means the RBI lowers this repo rate. Previously, it was 6.25%, and now it stands at 6%, which is a rate cut of 0.25% (25 basis points).

When the repo rate drops, banks can borrow money from the RBI at a lower interest rate, and they often pass this benefit on to people like you and me by lowering loan interest rates, which are floating rates.

How Are Repo Rate Cuts Related to Markets?

markets are always related to interest rates because most companies have borrowings from banks and financial institutions, and once the interest rates are reduced, their outstanding payment will be reduced, which results in reduced interest payables.

Apart from reducing the borrowings, there are a lot more things getting affected related to the repo rate cuts.

Borrowing gets cheaper: 

• Companies can take loans at lower interest to grow their businesses and build factories which helps a lot in their expansion.

Increases Purchase Power: 

• When interest rates are low, it's cheaper to borrow money to purchase things like a house, car, or personal expenses. 
• This can make people more likely to spend and buy big things, which helps boost the economy.

Investors get excited: 

• When interest rates are low, loans will become cheaper, companies will spend less on borrowing, and they can save more money. 
• This can make their stocks look like a better deal to investors.

So, rate cuts are like pressing a boost button for the economy, and markets often increase purchasing power.

How Are Markets Affected Due to Rate Cuts?

When the RBI announced its second rate cut of 25 basis points to 6% on April 9, 2025, here’s what happened to markets,

Stock Market:

• Sometimes it jumps up because investors think companies will make more money with cheaper loans. 
• For example, sectors like banking, real estate, and auto stocks might rise since they benefit from lower interest rates. 
• But if the market already expected the cut, it might not move much or even drop if there’s other bad news (like global trade worries).

Bond Market:

• Bonds are like IOUs that pay interest. When rates drop, new bonds pay less interest, so older bonds with higher rates become more valuable, and their prices go up. Bond yields (the return you get) might fall.

Rupee Value:

• If too much money flows into the economy, the rupee might weaken against the dollar, which can worry investors.
• In short, markets can go up, down, or stay flat depending on how people feel about the rate cut and other global events.

Pros and Cons Of Repo Rate Cuts

For every action taken by the RBI regarding rate cuts, someone will always benefit and be negatively affected.

PROS of Repo Rate Cuts

Rate cuts can be a big win for many people and businesses like,

Cheaper Loans:

Assume your have a home loan based on floating rate the home loan EMI might drop, saving you money every month.

Example:

Let's calculate the EMI for a home loan of ₹50 lakh for 30 years with interest rates of 6.25% and 6% respectively.

The formula for EMI is:

EMI = [P x R x (1 + R)^N] / [(1 + R)^N - 1]

Where:

• P = Principal loan amount
• r = Monthly interest rate (annual rate / 12)
• n = Loan tenure in months (years × 12)

Case 1: Interest Rate = 6.25%

• P = ₹50,00,000
• Annual interest rate = 6.25%
• Monthly interest rate = 6.25% / 12 = 0.5208% or 0.005208
• n = 30 × 12 = 360 months

EMI=₹30,646.19

Case 2: Interest Rate = 6%

• P = ₹50,00,000
• Annual interest rate = 6%
• Monthly interest rate = 6% / 12 = 0.5% or 0.005
• n = 30 × 12 = 360 months

EMI=₹29,919.48

• Before the rate cut (6.25%), the EMI would be ₹30,646.19.
• After the rate cut (6%), the EMI would be ₹29,919.48.
• The savings in EMI per month would be ₹726.71.

Boosts Spending:

Lower loan costs encourage people to buy more cars, homes, and TVs, which helps businesses grow.

Helps Companies:

Businesses borrow cheaply to expand, hire more workers, and increase profits, which can push stock prices higher.

Economic Growth:

More spending and investment can lift the whole economy, especially if it’s slowing down (like the RBI’s recent GDP forecast of 6.5% for FY26).

CONS of Repo Rate Cuts

Lower Savings Returns:

Banks might cut interest rates on fixed deposits (FDs) or savings accounts. If your FD earned 6% before, it might drop to 5.5%, reducing your income.

Risk of Inflation:

As interest rates are reduced, purchasing power increases if too many people start spending heavily on goods like veggies or fuel, which could raise prices, making things more expensive and can cause to higher inflation.

Rupee Weakness:

More money floating around can weaken the rupee, making imports like oil or gadgets become costlier.

Impact of Repo Rate Cuts on Individual Investors

Investors are affected by the rate cuts in both positive and negative ways such as,

If You Have Loans:

• Your EMI is on a floating rate It’s good news your home or car loan might drop a bit, ending you with extra cash on your hand each month.

If You’re a Saver:

• If you have a floating FD, the Interest earned on FDs will be reduced, so it’s bad news for you to earn less on your money.

If You Invest in Stocks:

• It depends on your stocks. Sectors Like banks, real estate, and auto might grow due to rate cuts and increasing purchasing power, boosting your portfolio.

If You Invest in Bonds or Debt Funds:

• Your bond fund’s value (NAV) could go up as bond prices rise with falling rates due to their inverse proportionality nature, especially if you own long-term debt funds.

Conclusion

The RBI’s second rate cut to 6% is like a gentle nudge to get the economy rolling faster. It makes loans cheaper, encourages spending, and can lift markets, especially stocks in banking, auto, and real estate.

For you as an investor, it’s a mixed bag, lower EMIs and potential stock gains are great, but shrinking FD returns and inflation risks aren’t. Markets might cheer short-term, but they’ll also watch global trends (like U.S. tariffs) and how fast banks pass on these cuts to us.