RBI Rate Cut Analyzed
Key Points
- RBI lowered the repo rate by 25 basis points to 5.25%.
- Financial stocks soared, especially rate-sensitive companies.
- The RBI injected liquidity with OMO purchases and swaps.
- Inflation forecasts remain below the 4% target.
- Lower borrowing costs could boost investment and growth.
- The policy aims for stable conditions amid global uncertainty.
On Friday, the Reserve Bank of India (RBI) made a significant move by reducing the repo rate – the interest rate at which banks borrow money from the RBI – by 25 basis points. This brought the rate to 5.25 percent. This action was unanimous among the members of the Monetary Policy Committee (MPC).
The impact was immediately felt in the stock market. Shares of companies that are sensitive to interest rates, like those in the financial sector, rose significantly. Specifically, the Nifty Realty index and the Nifty PSU Bank index increased by 1 percent each. The Nifty Auto, Nifty Bank, and Nifty Financial Services indices also saw gains in the range of 0.30 percent to 0.60 percent.
Several individual stocks saw even greater increases. Companies like SBI Cards and Payment Services, Shriram Finance, Cholamandalam Investment and Finance Company, Bajaj Finance, Bajaj Finserv, and Muthoot Finance from the Nifty Financial Services index jumped up to 2 percent on the NSE during intra-day trading. Additionally, stocks from the real estate sector, such as State Bank of India, Indian Bank, Punjab National Bank, Canara Bank, and Bank of India, along with property developers Prestige Estate Projects, DLF, and Oberoi Realty, also experienced gains ranging from 1 percent to 2 percent.
To further support the economy, the RBI announced additional measures. They plan to conduct open market operations (OMOs) – buying government securities – worth ₹1 trillion and engage in a 3-year USD/INR buy sell swap transaction of $5 billion. These actions are designed to inject more liquidity into the financial system.
RBI Governor Sanjay Malhotra stated that the bank expects inflation to remain at or below the 4 percent target during the first half of 2026-27. Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, explained that the MPC’s decision to prioritize growth, despite a robust economy, demonstrates a consensus among the MPC members.
Venkatesh Ramakrishnan, Founder and Managing Director at Research & Capital Management, noted, “The transmission of easing will matter more than the magnitude. Lower borrowing costs can gradually strengthen capital expenditure intentions, revive sentiment-sensitive segments such as housing, support credit flows to MSMEs, and improve working capital conditions across industries.”
Looking ahead, analysts believe this policy shift will create a more favorable environment for investments and economic growth. The RBI’s measures aim to provide stability and support for industries while managing inflationary pressures and external economic uncertainties.
“This decision could help prolong the current domestic growth cycle into FY27.” – Anil Rego
