The Reserve Bank of India's Monetary Policy Committee (MPC) meets every two months to decide on the repo rate — the rate at which RBI lends short-term money to banks. This single number is the anchor for virtually every interest rate in the Indian economy.
What the repo rate actually is
When commercial banks need short-term liquidity, they borrow from RBI at the repo rate. In a rate cut, RBI makes borrowing cheaper for banks, which should (with a lag) make borrowing cheaper for businesses and consumers. In a rate hike, the reverse occurs — credit tightens, consumption slows, and inflation moderates. The full transmission typically takes 6–12 months to work through the system.
Impact on home loans and EMIs
Since 2019, most bank home loans are linked to external benchmarks — primarily the Repo Linked Lending Rate (RLLR). A 25 bps (0.25%) repo rate cut should, in theory, reduce your home loan rate by 25 bps within one quarter, reducing your EMI proportionally. A 50 bps cut on a ₹50 lakh home loan with 15 years remaining saves approximately ₹1,600–2,000 per month in EMI. Rate hike cycles work in the exact opposite direction.
Impact on fixed deposits
FD rates lag the repo rate by 1–3 months but do generally follow the trend. In a rate cut cycle, FD rates fall — incentivizing you to lock in longer-term FDs before rates fall further. In a rate hike cycle, floating-rate or shorter-tenure FDs are preferable, allowing you to roll into higher rates as they become available.
Impact on bond funds
Bond prices move inversely to interest rates. When rates fall, existing bonds (paying the old higher coupon) become more valuable, driving up their price. Long-duration bond funds and gilt funds benefit significantly in aggressive rate cut cycles — sometimes delivering 10–15% returns in a single year. When rates rise, the same funds suffer capital losses. Short-duration and money market funds are relatively insulated from rate movements.
Impact on equities
Rate cuts are generally equity-positive: cheaper capital means higher corporate profits, more consumption, and better earnings growth. Rate hikes can compress valuations as the risk-free rate rises, making future earnings worth less in present value terms. However, the relationship is not mechanical — the reason for the rate change matters as much as the change itself. Rate cuts during a crisis signal economic stress, which is bad for equities despite the lower rates.