Impact of RBI's Recent Repo Rate Cut

On 6th June 2025, the Reserve Bank of India (RBI) decided to cut the repo rate by 50 basis points. After the recent cut, the repo rate has come down from 6% to 5.5%. The move is likely to help the Indian economy grow faster. But what does it mean for you and your money? In this article, we look at the different impacts of RBI's repo rate cut.

What is the repo rate?

The Repo Rate is the interest rate at which the Reserve Bank of India (RBI) lends money to commercial banks when they need short-term funds. In other words, when banks are low on cash, they go to RBI for a loan — and the Repo Rate is the cost they pay to borrow that money.

Repo stands for Repurchase Agreement. Banks sell government securities to RBI with a promise to buy them back later — usually the next day — at a slightly higher price. The difference in price = interest, which is the Repo Rate. Let us say the Repo Rate is 6% per year. A bank borrows Rs 1,000 crore from RBI. It agrees to pay Rs 60 crore as interest annually (or proportionately for the short term). This borrowing helps the bank meet immediate needs like giving loans to customers.

Impact of repo rate cut

Now that you understand the repo rate, let us look at the impact of RBI's recent repo rate cut. Here are the details:

Lower Borrowing Costs for Businesses & Households: Public sector banks like Bank of Baroda, PNB, Canara Bank, and IOB slashed their repo-linked lending rates by 50 bps — reducing loan EMIs across home, auto, personal, and MSME loans. Lower EMI means more affordable loans for borrowers.

Boost for Housing & MSME Sectors: Easing in loan rates is expected to revive demand for affordable and mid-income housing. How much does a borrower benefit? As per reports, someone with a loan of Rs 45 lakh home will save around Rs 2,848 per month over 20 years.  Similarly, MSMEs—which often operate with tight cash flows—will now find it easier to raise working capital or invest in equipment and expansion, thus supporting growth in the backbone of India’s economy.

Stimulus for Economic Growth: The repo rate cut is part of a broader monetary easing effort aimed at reviving economic momentum. By making borrowing cheaper and encouraging spending, RBI hopes to push GDP growth toward its 7–8% target. The move is particularly significant in the context of slowing private investment and global economic uncertainty.

When credit is cheaper and liquidity improves, businesses are more likely to invest in new projects, and consumers are more willing to spend. All of this fuels job creation and demand, setting off a virtuous cycle of growth.

Improved Money Supply and Banking Liquidity: Along with the repo cut, the RBI also announced a 100 basis points cut in the Cash Reserve Ratio (CRR), which is the percentage of deposits banks must hold with the RBI. This releases thousands of crores back into the banking system, enhancing liquidity. Banks will now have more funds available to lend, which supports credit growth across sectors.

Better liquidity encourages lending and stabilizes short-term interest rates in the interbank market. This is crucial for financial institutions managing daily cash requirements and interbank settlements.

Boost to Bond and Debt Fund Markets: Bond prices and debt mutual funds, especially those with long-term government securities (gilt funds), benefit from falling interest rates immediately. As yields decline, the price of existing bonds goes up, increasing the Net Asset Value (NAV) of bond and gilt funds.

Investors in long-duration funds are particularly well-positioned to gain. Meanwhile, short-duration and dynamic bond funds also benefit from improved returns due to mark-to-market gains. This makes debt funds an attractive alternative to traditional FDs for investors seeking both stability and better returns.

What are the negative impacts of cut in repo rate?

While borrowers benefit from lower loan rates, depositors face reduced returns on fixed deposits (FDs). Following the repo rate cut, banks have started reducing FD interest rates by 30 to 70 basis points. This makes FDs less attractive as a savings instrument, particularly for senior citizens and conservative investors who rely on them for steady income. As a result, there is a visible shift of retail investors toward higher-yielding instruments such as corporate bonds, non-convertible debentures (NCDs), and even some debt mutual funds, which offer better post-tax returns in a falling interest rate environment.

What does it mean for the equity market?

Equity markets welcomed the rate cut, particularly stocks in the NBFC (Non-Banking Financial Company) sector. NBFCs typically offer loans at fixed rates but borrow at variable rates—so when borrowing costs fall, their profit margins expand. As a result, stocks like Bajaj Finance, Muthoot Finance, and others saw sharp rallies.

On the other hand, traditional banks saw modest gains, as their margins may not expand as dramatically. Overall, the market sentiment turned positive in the short term, but analysts remain cautious due to concerns about inflation, currency volatility, and the global economic environment.

Before you go

The RBI’s latest repo rate cut is a bold and strategic move aimed at reviving growth, supporting credit flow, and boosting consumption across sectors. While it brings welcome relief to borrowers and small businesses through lower EMIs and affordable loans, it also poses challenges for savers who now face declining fixed deposit returns.

For investors, this shift in the interest rate environment opens new opportunities in debt mutual funds and high-yield bonds. However, the broader impact will depend on how quickly banks transmit these benefits, how consumers respond, and how external factors—like global interest rates and currency stability—evolve. In short, this is a growth-oriented policy with clear short-term gains, but it must be navigated wisely to ensure long-term economic stability.