For the stock market, repo rate cuts typically lower the cost of capital, encouraging borrowing and investment. This can boost corporate earnings and investor confidence. Rate-sensitive sectors such as banking, real estate, and automobiles often lead the rally, benefiting from cheaper credit and increased consumer demand.

On the corporate front, reduced borrowing costs can tip the scales in favour of greenlighting expansion projects, even as the ongoing tariff war between the US and China continues to disrupt supply chains, increase input costs, and create uncertainty for export-oriented industries. These external shocks affect investor confidence and corporate planning, complicating the RBI’s task of balancing growth and inflation.

When the RBI changes the repo rate, it doesn’t just affect the overnight borrowing cost for financial institutions; it shifts the risk-reward balance across different assets. The immediate impact is seen in the money market, where overnight rates adjust quickly. However, the more significant effect play out over weeks or even months, as banks and non-banking financial companies (NBFCs) reassess lending rates, companies reconsider investment plans, and investors adjust expectations for future earnings.

The stock market can sometimes rise when investors believe that lower borrowing costs will help companies increase their profits. Sectors like banking, real estate, and automotive tend to benefit the most from lower interest rates, leading to potential gains in these stocks. However, if the market had already anticipated the rate cut, the impact might be minimal, or the market could even decline if other negative factors, such as global trade concerns, overshadow the cut.

An increase in money supply due to rate cuts can sometimes weaken the rupee against the dollar. This devaluation may raise concerns among investors, as it could signal economic instability or raising inflation.

A higher repo rate raises the cost of borrowing for companies. When it happens, stock prices often decline as investors become more risk-averse. Conversely, when the repo rate is slashed, sectors such as banking, finance and real estate tend to benefit due to cheaper credit and increased consumer spending.