The RBI recently cut the repo rate by 25 basis points, bringing it to 5.25 percent. This makes borrowing cheaper and increases consumer purchasing power, thereby stimulating investment and demand.

Why does the entire market start dancing with just one announcement from the RBI's Monetary Committee?

RBI Monetary Policy Committee: The RBI's Monetary Policy Committee (MPC) meets every two months and makes policy decisions that directly impact the Indian economy, markets, and the public. The central bank's goal is to control inflation, ensure rupee stability, and maintain economic momentum. The MPC consists of six members—three from the RBI and three nominated by the central government. Its primary objective is to keep inflation within an average of 4 percent.

What does MPC do?

People often wonder how decisions made during MPC meetings affect the market, from loans to EMIs and employment. Dr. Aastha Ahuja, a professor at Aryabhatta College, Delhi University, explains that when the central bank formulates policy, it directly impacts interest rates, market liquidity, and investor sentiment. Changes in interest rates are primarily based on fluctuations in the repo rate.

Recently, the RBI cut the repo rate by 25 basis points, bringing it to 5.25 percent. This makes borrowing cheaper and increases consumer purchasing power, thereby stimulating investment and demand. However, this situation could increase the risk of capital outflows due to higher interest rates in foreign markets. This impacts the rupee, inflation, and the balance of payments (BOP). Currently, the rupee has already weakened against the dollar, crossing 90.

How are each sector affected?

In the stock market, large-cap stocks are performing relatively well, while mid-cap and small-cap stocks are under pressure. This is due to a lack of demand. RBI data shows that capacity utilization is at 75.8 percent, meaning private investment in the economy is weak. Therefore, simply reducing the repo rate will not accelerate investment unless domestic demand increases. To boost demand, the role of the government's fiscal policy becomes crucial.

The structure of income and savings in India also impacts investment. Only 8–9 percent of the country's population has sufficient savings, mostly from the upper-middle and wealthy classes. Savings among the middle and lower-middle classes are very low, leading to a significant amount of savings going into mutual funds and the stock market, especially when returns on fixed income are uncertain.