From EMI to economy: What RBI's 50 bps repo rate cut means for various sectors

RBI's bigger-than-expected rate cut is its last move for the year, economists say: Reuters poll

Reserve Bank of India on June 6 announced reduction in its key repo rate by a larger-than-expected 50 basis points and this means good news for many sectors, including stock markets.

Lower repo rate means cheaper loans for homebuyers, auto buyers and businesses.

On June 6, RBI reduced the key repo rate from 6% to 5.5%, its most aggressive cut since Covid-era easing. The rate cut comes amid US President Donald Trump's tariff threat, which could mean an export shock and global bond yield chaos.

EMIs to drop

The rate cut is likely to provide some EMI relief to the public. Repo rate is the rate at which the RBI gives loans to the banks. As banks take loans at a lower rate from RBI following the rate cut, they may lower their own interest rates on customers as well.

“The 50 bps rate cut, coupled with the 100 bps reduction in the Cash Reserve Ratio (CRR), injects much-needed liquidity into the system. This gives banks more headroom to transmit lower rates and improve credit flow — both to consumers and businesses. It’s a timely and calibrated move,” said Vijay Kuppa, CEO of InCred Money.

“The MPC has changed its stance from Accommodative to Neutral which means further rate cuts are not imminent. Any further action will depend on how inflation and growth dynamics evolve from here. For borrowers, this is good news — EMIs will drop further. For investors, FD rates may slide, so locking in FDs & Bonds may help before there is a material drop in the yields. For investors, this is a time to stay diversified,” he added.

Banking

The rate cut is likely to compress net interest margins (NIMs) for banks, as lending rates are expected to adjust downward more quickly than deposit rates. However, credit growth in retail and MSME segments is projected to remain strong, with estimates pointing to a 10–12 percent year-on-year rise. The credit-deposit gap is likely to widen. The non-banking financial companies (NBFCs), particularly non-deposit takers, may benefit earlier due to quicker rate transmission.

Real Estate

The reduction in home loan rates is expected to enhance affordability for prospective buyers. Developers are currently holding over 4.5 lakh unsold housing units across metro cities, which may find increased traction. Demand from Tier 2 and Tier 3 cities is projected to grow 14 percent year-on-year, according to estimates by property consultant Knight Frank.

Auto

Lower borrowing costs are expected to ease entry-level car EMIs, improving affordability for first-time buyers. A rebound in demand for tractors and two-wheelers is expected in rural areas, supported by improved liquidity. As per data from the Federation of Automobile Dealers Associations (FADA), passenger vehicle bookings rose 11 percent year-on-year following the previous rate cut in April.

FMCG and Consumer Durables

Easing loan repayments are expected to leave more room in household budgets for discretionary spending. The rural economy may see a multiplier effect from improved spending power. NielsenIQ data shows rural FMCG sales rose 6 percent in the first quarter of FY25.

Infrastructure

With the cost of capital now at a three-year low, sectors linked to capital expenditure, including steel and cement, may benefit. The infrastructure pipeline under the Gati Shakti programme currently stands at Rs 111 lakh crore.

IT

Indian currency had dropped to nearly 86 against the US dollar intraday, in line with expectations of a rate cut. However, as markets skyrocketed over the news of a CRR cut and jumbo rate cut, the Indian currency also recovered losses to close at 85.625 against the US dollar.

However, a higher-than-estimated rate cut is generally expected to weaken Indian rupee. IT stocks will directly be impacted by such volatile movements in the Indian currency, as the Indian IT companies derive a major portion of their revenue through exports to US.

If the rupee weakens, IT stocks including Infosys, Tata Consultancy Services (TCS), Coforge and Persistent Systems may see a strong surge due to their rise in export margins. However, if the rupee strengthens further, it will instead cause a downturn in the IT sector, affecting their export margins and subsequently, their stock prices.

Along with IT stocks, export-oriented pharma and chemical stocks will also see similar impact in their share prices from rupee’s movement.

Clean energy companies

An expected weakening of the rupee after the rate cut will also increase the import bills of oil marketing companies like Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL). This comes as India imports nearly 85 percent of its crude from outside. However, if rupee beats estimates and continues to rise against the US dollar, the stocks may see a significant rise. Clean energy players like Adani Green and Tata Power may anyhow see strong upside as the rate cut may lower debt servicing costs.