The Reserve Bank of India (RBI) has cut the repo rate by 25 basis points, bringing it down from 6.25% to 6%, during the Monetary Policy Committee (MPC) meeting held in April 2025. The decision, which marks the second straight cut after February’s reduction, was taken unanimously by all six members of the MPC.

The RBI also changed its monetary policy stance from “neutral” to “accommodative”, signalling a potential for further rate easing in the near future. This shift indicates that the central bank is prioritising economic growth, especially amidst ongoing global uncertainties and relatively low inflation.

However, the stock market’s reaction was muted and mixed, as investors were divided on how much the rate cut would actually support broader demand and sectoral recovery.

Understanding the Repo Rate Cut

The repo rate is the interest rate at which the RBI lends short-term funds to commercial banks. A reduction in this rate typically means that banks can borrow more cheaply from the RBI, which could lead to:

• Lower interest rates on loans for consumers and businesses

• Increased credit availability

• Boost to consumption and investment

This latest cut brings the repo rate to 6%, down from 6.5% in early February 2025, marking a total reduction of 50 basis points in the first quarter of the year.

SDF and MSF Rates Also Adjusted

In line with the repo rate cut, the Standing Deposit Facility (SDF) rate and Marginal Standing Facility (MSF) rate have also been adjusted. The SDF rate now stands at 5.75%, and the MSF rate is at 6.25%, both reduced by 25 basis points.

This symmetrical adjustment ensures the interest rate corridor is maintained, giving banks predictable pricing while borrowing or parking surplus funds.

Market Impact: Sector-Wise Performance

Auto Stocks See Modest Gains

The auto sector reacted positively to the rate cut, with hopes of improved consumer demand for vehicles due to lower EMIs and financing costs. Key performers included:

• Mahindra & Mahindra (M&M)

• Bajaj Auto

• Maruti Suzuki

• Tata Motors

These stocks were up by up to 1%, reflecting optimism that cheaper loans will boost car and two-wheeler sales.

Banking and Financial Stocks Decline

In contrast, banking and financial sector stocks were under pressure. Although lower interest rates typically help loan growth, they can also compress net interest margins (NIMs) in the short term, especially if deposit rates don’t adjust proportionately.

Top laggards in the Nifty Financial Services index included:

• Shriram Finance

• Muthoot Finance

• Bandhan Bank

• ICICI Bank

These counters fell up to 2.38%, indicating investor caution around earnings impact and credit growth outlook.

Real Estate Stocks Also Fall

Real estate stocks, which usually benefit from rate cuts due to cheaper home loans, were surprisingly down. This could be due to weak demand in urban housing markets and broader macroeconomic uncertainties affecting the sector.

Benchmark Indices Remain Flat

Despite the rate cut, the benchmark indices – Nifty 50 and Sensex – ended flat. Investors likely adopted a wait-and-watch approach, with many expecting the actual transmission of rate cuts into the system to take time.

This lack of sharp rally suggests that expectations of a rate cut were already priced in, and the market is now looking for concrete signals of growth revival.

MPC’s Unanimous Decision and Forward Guidance

The MPC’s decision to both cut the repo rate and adopt an accommodative stance was taken unanimously. According to the RBI, this was made possible by a comfortable inflation trajectory, with CPI inflation remaining below the 4% threshold, thus allowing more room to support economic activity.

Governor Sanjay Malhotra noted that the central bank is focused on ensuring that real interest rates remain supportive of investment and consumption, especially given the volatile global environment and slowing exports.

The accommodative stance signals the possibility of further easing if inflation remains in check and growth doesn’t pick up meaningfully.

Rate Cut Comes Amid Global Uncertainty

This move aligns with trends among major central banks, which are also looking to ease monetary policy amidst slowing global trade and geopolitical tensions. For India, where domestic consumption is a key growth driver, this rate reduction could help revive demand in interest-sensitive sectors.

However, the RBI also warned that fiscal prudence and supply-side interventions remain crucial to ensure inflation does not spike due to unforeseen food or fuel shocks.

Expert Reactions and Future Expectations

Economists and market experts largely welcomed the rate cut, stating it was in line with expectations, and believe that another rate cut may be possible in the next policy meeting if the inflation outlook remains benign.

• "The accommodative stance gives the central bank room to manoeuvre," said an economist from SBI Research.

• "Auto and housing sectors stand to benefit the most in the near term," noted a market strategist at Kotak Securities.

Investors will closely monitor the following over the next few weeks:

• Loan rate reductions by commercial banks

• Transmission of the repo rate cut into lending rates

• CPI inflation data and its deviation from RBI’s target

• Global commodity price movements and crude oil impact

Conclusion: Boost to Growth but Challenges Remain

The 25 basis point repo rate cut, along with the shift to an accommodative policy stance, is clearly intended to stimulate domestic demand and economic growth.

While auto stocks responded positively, the broader reaction in financials and real estate shows that investors are cautious, possibly anticipating delayed impact or near-term margin pressure on banks.

The RBI’s balancing act between growth and inflation management seems to be entering a pro-growth phase, but it must remain vigilant about global risks and internal vulnerabilities.

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