The RBI repo rate cut to 5.25 percent signals a shift toward supporting growth, and the policy move immediately became the main driver of market sentiment. The decision affects borrowing costs, liquidity conditions and expectations for early 2026, making the repo rate the central focus of financial markets.
Market reaction shifts as rate cut resets expectations
The rate cut was widely anticipated, but the exact market response depended on how traders interpreted the RBI commentary. Equity traders viewed the move as supportive for banks, real estate and consumer sectors, while bond traders focused on how the lower policy rate could narrow yields and increase appetite for duration. The repo rate cut also influenced the short term debt market where commercial paper and certificate of deposit rates began adjusting in line with the new policy signal.
A key point for investors was the RBI’s emphasis on stabilizing liquidity in the banking system. With sustained growth in credit demand and uneven deposit flows in recent months, banks were likely to adjust lending rates gradually rather than push immediate revisions. The market also weighed whether more cuts could follow in early 2026 depending on inflation behaviour and global conditions.
Bond markets evaluate yield curve direction and liquidity cues
Bond markets were more cautious. Traders monitored how the cut would influence the benchmark ten year yield and whether liquidity operations from the RBI would follow the policy move. The central bank has been active in managing liquidity through bond buybacks and foreign exchange swaps, and a fresh rate cut added another layer to expectations around government borrowing costs.
Lower rates typically support bond prices, but the impact depends on volumes, auction demand and global yields. With US and European bond markets still volatile, Indian traders assessed whether the domestic rate cut was strong enough to offset external pressures. The yield curve flattening became an early theme as short term rates fell faster than long term yields.
Banks, NBFCs and corporate borrowers reassess cost of capital
For lenders, the rate cut provided incremental relief in funding costs, although the transmission process is usually staggered. Banks typically revise their external benchmark linked lending rates first, followed by adjustments to loans and deposit products. Non banking finance companies, which rely more on market borrowing, expected quicker benefits through lower issuance yields.
Corporate borrowers in manufacturing, telecom, infrastructure and real estate viewed the decision as a mild boost to capex planning. With demand conditions gradually improving and inflation remaining inside comfort levels, the policy environment became more predictable for budgeting and investment cycles. However, export dependent sectors remained sensitive to the rupee trajectory and global demand trends, which could limit the positive effect of cheaper domestic borrowing.
Equity markets track sector rotation as investors gauge next moves
Equity investors moved into rate sensitive pockets such as banks, auto, real estate and consumer durables. The broader indices attempted to price in the medium term growth signal implied by the cut. At the same time, traders watched how foreign investors would react, especially after recent fluctuations in global risk appetite.
The risk for markets lies in how quickly or slowly the RBI continues with its easing cycle. If inflation stays contained and global commodity prices remain stable, the possibility of another cut cannot be ruled out. However, a sudden rise in oil prices or geopolitical risks could limit room for further easing.
Takeaways
RBI cut repo rate to 5.25 percent impacting borrowing costs across the system
Bond markets reacted cautiously as traders tracked yield curve signals
Banks and NBFCs expected gradual transmission of lower rates
Equity markets saw rotation into rate sensitive sectors
FAQs
Why did the RBI cut the repo rate?
The central bank cut the repo rate to support growth momentum, maintain liquidity stability and keep borrowing conditions aligned with slowing inflation.
How will the rate cut affect home and auto loans?
Lenders are expected to gradually adjust lending rates. External benchmark linked loans may see quicker revisions, reducing EMI burden over the coming months.
Will more rate cuts follow?
Further cuts depend on inflation data, global financial conditions and domestic liquidity trends. If inflation stays stable, the RBI may consider additional easing in 2026.
How does this impact the bond market?
Short term yields typically fall faster after a repo rate cut. Long term yields react more slowly and depend on government borrowing plans and global interest rate movements.
