We often hear that investments and securities are subject to market risks. But what does that really mean? There are many factors that affect the performance of investment securities, and one of the most influential is the Reserve Bank of India (RBI) repo rate. On June 6th, 2025, the RBI cut the repo rate by 0.50%, bringing it down to 5.50%. If you’re unsure how this impacts your investments, this article will guide you through the implications.
To understand this fully, it’s best if you’re familiar with repo rates and their purpose. If you’re not, we recommend checking our earlier article on repo rates before reading this one. This article is divided into three sections: impact on bonds, on the stock market, and on the broader economy.
Let’s begin with bonds. Bonds are highly sensitive to interest rate movements. Typically, when interest rates go up, bond prices fall. Conversely, when rates go down, bond prices rise. This is due to an inverse relationship existing bonds with higher coupon payments become more attractive when new bonds offer lower rates, pushing up their prices and reducing yields.
This effect is especially visible in government securities with tenures of 2–5 years and AAA-rated corporate bonds, which are particularly rate-sensitive. However, this time, the reaction didn’t follow the usual pattern. After the repo rate was cut to 5.50%, the market response was more cautious. Some bond yields fell particularly in the 5-year G-secs while yields on short-term government securities remained muted. Even the benchmark 10-year bond showed minimal movement.
Why? Because the market had already anticipated the rate cut. In the days leading up to the decision, yields began to decline as traders priced in the expected move. As a result, the usual post-cut steepening of the yield curve didn’t occur. Moreover, the RBI’s shift in monetary stance from “accommodative” to “neutral” signaled a possible pause in further cuts, causing longer-term investors to become more cautious.
In the bond space, short-term government bonds and T-bills remain in demand, appreciating in price due to their sensitivity to rate changes and liquidity preference. Floating Rate Bonds (FRBs), which reset their coupon payments based on prior repo rates, are also directly impacted. Corporate bonds particularly AAA-rated ones and those issued by NBFCs have seen their spreads narrow compared to government securities, as borrowing becomes cheaper. NBFCs and real estate-backed bonds, which rely heavily on interest rate trends, have attracted increased attention.
Another significant move by the RBI on June 6th was the reduction of the Cash Reserve Ratio (CRR) by 100 basis points from 4% to 3%. CRR is the percentage of a bank’s total deposits that must be kept in reserve with the RBI in cash. A reduction in CRR boosts liquidity, giving banks more money to lend or invest. According to sources, this move will release approximately ₹2.5 trillion into the banking system, which can be used for business loans and consumer credit. This too has implications for the bond market and beyond.
Now let’s turn to the stock market. While stock markets do respond to interest rate decisions, their reaction is typically less immediate and less pronounced compared to the bond market. Stock prices are primarily influenced by business performance. However, repo rate cuts are generally viewed positively by equity investors. Lower interest rates allow consumers to save on loan EMIs and spend more, which boosts business revenues and profits key drivers of stock prices. Still, the impact on stock markets is gradual and indirect. Unlike bonds, the effects of repo rate changes take time to show up in company performance and, in turn, stock prices.
From a macroeconomic standpoint, the reduction in repo rates will make loans cheaper, encouraging borrowing and investment. This is particularly beneficial for rate-sensitive sectors like real estate, automobiles, and consumer durables. For instance, lower home loan rates may encourage more home purchases, which will not only benefit the housing sector but also associated industries such as cement, steel, and construction.
According to Moneycontrol, there are over 4.5 lakh unsold housing units across India’s metro cities. With lower interest rates, this inventory might start clearing, driven by increased buyer interest. The automobile industry may also see a rise in demand, as vehicle loans become more affordable. Banks, in turn, benefit from increased credit activity.
However, these impacts don’t materialize overnight. The economy moves through cycles expansion, peak, slowdown, and recovery. Rate cuts are just one of the tools RBI uses to manage these phases. By reducing borrowing costs and increasing liquidity (via CRR cuts), the RBI is attempting to move the economy from stagnation or slow growth into an expansionary phase.
As an investor or observer, it’s important to keep an eye on how consumer spending evolves, how businesses respond, and how inflation behaves. Each of RBI’s policy steps whether it’s adjusting the repo rate or altering liquidity conditions affects the flow of money, market sentiment, and ultimately your investments.
Also Read: When the RBI Cuts Rates, Who Really Wins and Who Loses?
