In a significant move, the Reserve Bank of India (RBI) has reduced the repo rate by 25 basis points, bringing it down to 6.25%. This is the first rate cut in almost five years and aims to boost the economy as growth slows.
This is the first rate cut since May 2020. Previously, the RBI had kept the repo rate unchanged at 6.5% for eleven straight meetings. In its December policy review, the MPC voted 5-1 to hold rates, focusing on controlling inflation while ensuring economic stability. Economic Times
Hopes for a rate cut grew after the Union Budget for FY26, which reduced the tax burden on individuals to boost spending. Additionally, the budget maintained the capital expenditure target for the next fiscal year at nearly the same level as last year’s budgeted amount. However, it has been revised this year. Economic Times
Market Reaction: Auto & Realty Stocks Gain, Banks Slip
After the announcement, auto and real estate stocks jumped by up to 3%, while banking and financial stocks declined by nearly 1.5%. Auto stocks like Apollo Tyres, Ashok Leyland, M&M, and Samvardhana Motherson International gained up to 3%. Lodha, Godrej Properties, and Oberoi Realty rose between 1% and 2.6% in the real estate sector.
Meanwhile, banking and financial stocks declined, with Bajaj Finance, SBI, Axis Bank, and ICICI Bank among the top losers from the Nifty Financial index, falling up to 1.2%.
Reasons Behind the Repo Rate Cut
The Monetary Policy Committee (MPC) unanimously decided to cut the rate. RBI Governor Sanjay Malhotra explained that while growth is improving, it is still lower than last year. With inflation under control, the central bank saw an opportunity to lower rates to support the economy while maintaining price stability.
RBI’s Policy Moves: CRR Cut and Growth Projections
CRR Reduction to Boost Liquidity | -In its December policy review, the RBI kept the repo rate unchanged. -It reduced the Cash Reserve Ratio (CRR) by 50 basis points, lowering it to 4%. -This step aims to improve liquidity in the banking system and support credit growth. |
Growth Projections for FY25 | -The RBI has projected India’s real GDP growth to be 7.2% for FY 2024-25. -In contrast, the Economic Survey estimates a lower growth of 6.4%, aligning with NSO projections. |
RBI’s Growth Outlook for FY26 | -The Monetary Policy Committee (MPC) expects India’s GDP to grow 6.7% in FY26.- The RBI projects India’s GDP growth for FY26 at 6.7% in Q1, rising to 7% in Q2 and then moderating to 6.5% in Q3 and Q4. -The December 2024 forecast was revised downward, reflecting evolving economic conditions. |
Understanding the Repo Rate
The RBI’s repo rate cut was much awaited. Let’s understand the repo rate and why it matters. It’s the interest rate at which the RBI lends money to banks. When the repo rate is lowered, borrowing becomes cheaper for banks, allowing them to offer lower interest rates on loans. This helps boost spending and investment, supporting economic growth.
Know More: SEBI Registered investment advisory | Stock investment advisory
Current Economic Indicators
India’s economic growth has been challenging. The GDP growth rate fell to 5.4% in the September quarter, the lowest in two years. Projections for the current fiscal year have been revised to 6.4%, a decline from the 8.2% growth observed in 2023-24. High price pressures, stagnant wages, weak consumption, and recent corporate earnings disappointments have contributed to this slowdown.
Inflation Trends
Despite retail inflation remaining above the RBI’s target, there has been a declining trend. It has eased to a four-month low, and expectations are that it will continue to decrease, barring any unexpected supply shocks. This downward trend in inflation has provided the RBI with the flexibility to reduce the repo rate to support growth. reuters.com
Impact on Borrowers and Investors
For retail borrowers with floating-rate loans, this rate cut is welcome news. As banks pass on the benefit of the lower repo rate, equated monthly installments (EMIs) are expected to decrease, making loans more affordable. Borrowers also have the option to keep their EMIs constant while reducing the tenure of their loans. livemint.com
On the flip side, fixed deposit investors might see a reduction in interest rates offered by banks. With the repo rate cut, banks may lower the rates on fixed deposits, affecting returns for investors seeking safe investment avenues.
Market Reactions
The stock markets responded positively to the rate cut. Sectors sensitive to interest rates, such as financials, automobiles, and real estate, saw gains. The Nifty 50 index increased by 0.35% to 23,684.2, while the BSE Sensex gained 0.28% to 78,274.35. However, the rupee continued to struggle, weakening slightly to 87.47 per dollar.
Looking Ahead
The rate cut boosts the economy, but the RBI is cautious. It follows a balanced regulation approach and lets market forces decide the exchange rate, stepping in only to control extreme fluctuations.
Conclusion
The RBI’s decision to cut the repo rate after a prolonged period reflects its commitment to supporting economic growth while keeping inflation in check. As this policy unfolds, stakeholders will keenly observe its impact on various sectors of the economy.
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FAQs
What is the repo rate, and why did the RBI cut it?
The repo rate is at which commercial banks borrow money from the RBI. The RBI cut it by 25 basis points (bps) to stimulate economic growth by encouraging lending and investment. This reduction makes borrowing cheaper for banks.
How does this rate cut impact the real estate sector?
Lower repo rates typically lead to lower home loan interest rates. This makes buying homes more affordable, boosting demand and potentially increasing sales and prices in the real estate sector.
What’s the effect on the auto industry?
Like real estate, lower interest rates on car loans make vehicle purchases more attractive. This can drive sales and benefit the auto industry, increasing production and potentially higher stock prices.
Why did banking stocks drop despite the rate cut?
While lower rates can increase loan demand, they can also compress banks’ net interest margins (NIMs) – the difference between interest earned on loans and interest paid on deposits. This potential squeeze on profitability can negatively impact banking stocks.
What’s the overall impact on the economy?
The repo rate cut aims to make borrowing cheaper, encouraging businesses to invest and consumers to spend. This increased economic activity can lead to higher GDP growth, but if not managed carefully, it can also fuel inflation.