RBI Repo Rate Cut What it Means for Your Investments

May 3, 2025

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At its Monetary Policy Committee (MPC) meeting on 9th April 2025, the Reserve Bank of India (RBI) lowered the repo rate by 25 basis points to 6.00%. Under the direction of RBI Governor Sanjay Malhotra, who assumed office in December 2024, this is the second consecutive rate drop.

This move comes as the central bank seeks to reach a delicate balance, supporting growth while preventing inflation from spiraling out of control. What does this signify for you, your money, your investments and the whole economy?

Let us read ahead to know more:

RBI Repo Rate Cut: What Does it Mean

This RBI policy meeting has unquestionably been historic. RBI cut the repo rate by 25 basis points in the February policy meeting, bringing it from 6.50% to 6.25%. And now, the Reserve Bank of India has reduced its main policy repo rate by 25 basis points, from 6.25% to 6.00%. The GDP and inflation objectives for the upcoming fiscal year were also modified by the Reserve Bank of India.

RBI Repo Rate Historical Data - 2015 to 2025

How This Cut Could Affect the Economy and Investments

Banks' cost of borrowing is decreased by a repo rate cut, which usually results in lower interest rates for businesses and consumers. This promotes more business, auto, and housing loans, increasing investment and expenditure. Due to increasing liquidity and consumer demand, equity markets and industries like real estate may see a rise in activity, but investors may expect a decrease in returns from fixed-income products like fixed deposits.

Impact of Repo Rate Cut on Debt Funds and Bonds

● In the bond market, the repo rate cut directly and positively affects outstanding bonds, particularly longer-term bonds. Since new bonds are issued at a reduced coupon (interest) rate, older bonds with higher rates become more attractive, as they offer higher yields compared to the newly issued ones. This leads to an increase in the price of old bonds, especially long-term bonds, since they are more responsive to movements in interest rates. Thus, bond prices are inversely related to interest rates—when interest rates decline, bond prices increase.

● This directly impacts debt mutual funds, which put money into bonds of different tenures. Bond duration is a measure of a bond's price sensitivity to changes in interest rates. Short-term debt funds benefit moderately as they have low duration and, hence, are not very sensitive to changes in interest rates. Medium-term funds feel the impact better as they have relatively greater duration sensitivity. Long-term debt funds, particularly government security-based debt funds (such as gilt funds), however, benefit most as their NAV (Net Asset Value) rises considerably as the prices of bonds go up following a rate cut.

● From a general asset allocation point of view, a rate cut brings a movement of funds from the debt market into the equity market. With fixed-income instruments (such as bonds) starting to yield lower returns, investors may choose equities for better returns, considering other factors that impact their investment decisions. This reallocation drives equity market rallies. In the case of a rate increase, however, the bond yields are more attractive and encourage investors to move out of equities and into debt.

● Following a cut in the rate, these old bonds appreciate in market price. On the other hand, new bonds issued post the cut will yield less and thus are less appealing unless they have extra credit spreads or features to make up for the decreased interest.

Upsides of Repo Rate Cut

Below are the economic advantages of the Repo Rate cut by the RBI that you need to know:

1. Lower Borrowing Costs: The cost of borrowing from the RBI decreases when the repo rate is lowered to 6%. Lower interest rates on house, personal, and auto loans are usually the result of this, which makes EMIs more manageable for borrowers and promotes more investment and spending.

2. Boost to Economic Growth: Reduced loan costs encourage demand and company growth, which boosts GDP. The RBI's accommodating approach seeks to reduce trade tensions and global uncertainty while promoting economic growth and job creation.

3. Increased Credit Flow: Banks are more likely to lend when borrowing costs drop, increasing the financial system's liquidity. Industries that rely substantially on bank financing, such as real estate, autos, and MSMEs, gain from this enhanced credit flow.

4. Positive Market Sentiment: As businesses gain from lower capital costs and increased consumer demand, lower interest rates frequently increase investor confidence and equity markets, which may raise stock prices.

Downsides of Repo Rate Cut

Some of the downsides of this rate cut are as follows:

1. Decreased Returns for Savers: Following a repo rate drop, banks typically reduce interest rates on savings and fixed deposit accounts. For retirees and cautious investors who rely on fixed-income yields for consistent cash flow, this lowers income.

2. Inflationary Pressure: Higher demand brought on by increased borrowing and expenditure could raise prices if supply cannot keep up.

3. Pressure on Bank Margins: A cut in the repo rate can lead banks to reduce lending rates. If deposit rates do not fall at the same pace, the net interest margin (NIM), which is the difference between a bank’s interest income and interest expense, expressed as a percentage of its average earning assets, contracts, potentially impacting bank profitability and overall financial stability.

4. Currency Volatility: Lower interest rates may discourage foreign investment inflows, which could result in depreciation pressure on the Indian rupee, which could raise import costs and influence inflation.

Things You Can Do as an Investor

As an investor, you should take these steps to combat the effect of the repo rate cut on your portfolio:

1. Review Asset Allocation

Rate cuts result in a decrease of income for cautious investors (who invest in FDs, bonds, and debt mutual funds). Diversify your portfolio by adding mutual funds, stocks, or real estate to preserve and increase your wealth. For instance, while stocks have traditionally produced returns of 12–15% over the long run, debt funds typically yield 6-8% and can profit from declining interest rates. Rising demand and more affordable home loans might also benefit real estate investments.

2. Monitor Inflation

India's recent inflation rate was between 4 and 5%, which is not far from the RBI's 4% objective. When inflation surpasses the interest received on bonds or fixed deposits, your money loses purchasing power, resulting in negative real returns. For example, you lose 1% a year if your fixed deposit earns 5% while inflation is 6%. By keeping a close eye on inflation, you may make necessary adjustments to your investments and perhaps move money to more value-preserving assets like stocks or inflation-indexed bonds.

3. Maintain Liquidity

Keeping a percentage of your investments (5–10%) in readily accessible forms, such as liquid mutual funds or savings accounts, is known as maintaining liquidity. This adaptability enables you to handle crises or quickly seize market opportunities without having to liquidate long-term assets at a loss. Having liquid assets, for instance, enables you to purchase high-quality stocks at reduced rates if the stock market declines after the rate drop, optimising your potential returns when the market rises.

4. Consult Financial Advisors

The repo rate cut affects different asset classes differently, complicating portfolio management. A financial advisor can help you adapt your investments to your risk tolerance and objectives. If you have a long-term goal in mind, an advisor could recommend that you increase your equity exposure or switch to short-term debt funds if you prefer less risk. Their knowledge keeps your portfolio balanced and matched with changing economic conditions, boosting incentives while eliminating risks.

5. Don’t Fear the Policy Swings

Rate cuts make headlines, but they rarely demand knee-jerk reactions. India’s last easing cycle wrapped up in May 2020, and markets have weathered two full years of rate hikes and a year-long pause since then- proof that portfolios can absorb policy swings if they’re built on sound goals.

The RBI's decision to lower the repo rate to 6.00% offers Indian investors benefits as well as drawbacks. Those who save have to cope with lower returns on fixed deposits, while borrowers enjoy lower interest rates. The solution to managing this change is diversifying your holdings, keeping an eye on inflation, keeping cash on hand, getting assistance from professionals when necessary, and also avoiding hasty choices in favour of long-term financial objectives.

-Marifur Rahaman

-Dayco India

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RBI Repo Rate Cut What it Means for Your Investments

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