The Reserve Bank of India (RBI) has recently implemented a significant rate cut, the largest in years, sending ripples throughout the Indian economy. This move, a reduction of 50 basis points, brings the repo rate down to 5.5%. This decision, made in light of easing inflation and a desire to stimulate economic growth, has created a mixed bag of implications, generating both winners and losers.

The Rationale Behind the Cut

The RBI's primary motivation behind this aggressive rate cut is to boost economic growth. Explaining the rationale for the cut, RBI governor Sanjay Malhotra stated that growth is "lower than our aspirations" and the bank felt it was "imperative to stimulate domestic consumption and investment" amid rising global uncertainties. Data released last week showed that India's economy grew by 6.5% in the previous financial year ending March. The country remains the world's fastest expanding major economy, although growth has sharply dropped from the 9.2% high recorded in financial year 2023-24. The rate cut comes on the back of two previous reductions in April and February.

Winners: Who Benefits from Lower Rates?

• Borrowers: This is perhaps the most direct and widely felt impact. Existing and prospective borrowers, particularly those with home loans, stand to gain significantly. Lower interest rates translate to reduced EMIs (Equated Monthly Installments), making home ownership more affordable. A 50 bps cut translates to significant monthly savings—on a ₹1 crore home loan over 20 years, the EMI could drop by about ₹3,000. Alternatively, borrowers can keep their EMIs unchanged and opt to reduce their loan tenure, potentially saving lakhs in interest over the life of the loan. Interest rates on car loans, personal loans, and business loans are also likely to come down, making it a good time to borrow if you need funds for a big purchase or to expand your business.
• The Real Estate Sector: Lower borrowing costs can potentially boost demand in the Indian real estate sector, especially in affordable and mid-income segments. This is particularly good news for a sector that faced sharp pandemic fallout, with sales and new launches shrinking in the top 7 cities.
• Corporates: Lower interest rates make it easier for companies to borrow money to expand their businesses, build new factories, or launch new products. This can lead to higher profits, which in turn can cause their stock prices to go up.
• The Stock Market: A repo rate cut can be a positive signal for the stock market. When FD rates fall, investors who want to earn higher returns start looking for other options. Many decide to move their money into the stock market, which increases the demand for shares and can push prices higher. Sectors like real estate, auto, and consumer goods tend to benefit because cheaper loans make it easier for people to buy homes, cars, and appliances.

Losers: Who Faces Challenges?

• Fixed Deposit (FD) Investors: The RBI's rate cut sparks concerns among fixed deposit investors facing declining returns. Banks are expected to lower fixed deposit (FD) interest rates in response to this move. Short- and medium-term FDs are likely to witness the most serious rate cuts. For example a 1 year fixed deposit rate dropping from 7% to 6.5% would result in ₹5,000 less annual interest on a ₹10 lakh deposit.
• Savers: While borrowers benefit, savers are set to lose. Malhotra emphasized that "lower lending rates will help revive household demand and spur credit growth," as the central bank looks to support consumption without risking inflation.
• Banks: While lower rates and policy transmission could have weighed on bank net interest margins in the near term, the sizeable CRR cut provides a significant offset, making this a particularly positive move for banks.

Navigating the New Landscape

The RBI's move also involves a shift in its monetary policy stance from "accommodative" to "neutral", indicating that further rate cuts will depend on how India's growth-inflation dynamic evolves.

Fixed deposit investors need to reassess their investment goals and strategies. Given traditional fixed deposits provide safety, their diminishing returns in a low interest rate environment necessitate exploring alternative investment avenues. Diversification of investments and staying informed about economic indicators can provide investors the path to navigate this challenging landscape. Financial advisors recommend locking in current FD rates or exploring alternatives like debt mutual funds or government bonds.

The rate cuts create a favourable backdrop for credit growth and economic expansion, but also necessitate portfolio adjustments to navigate the changing interest rate landscape. As India navigates global uncertainties and domestic growth aspirations, the RBI's monetary policy will remain critical in maintaining the delicate balance between supporting growth and ensuring macroeconomic stability.