Yes, the repo rate does affect your investments, and there is a clear connection between the
two. The repo rate is set by the Reserve Bank of India (RBI) and is the interest rate at which
commercial banks borrow money from the RBI. When the repo rate changes, it impacts several
investment avenues in different ways.
Let’s start with fixed income investments, like Fixed Deposits (FDs). When the RBI raises the
repo rate, banks typically increase their deposit rates as well. This means that you could earn
higher returns on your fixed deposits and savings accounts after a repo rate hike.
Right now, the repo rate is held steady at 6.5%, which means that in the short term, FD rates
are expected to remain stable. However, if the RBI were to increase the repo rate, you might
see higher FD returns in the future. On the flip side, if the RBI cuts the repo rate, FD rates could
decrease, resulting in lower returns for those with money invested in FDs.
Next, let’s look at debt mutual funds. These funds invest in bonds, and their returns are directly
influenced by the repo rate. When the repo rate is increased, short-term debt mutual funds tend
to benefit because these funds usually invest in short-duration bonds that offer better yields
when interest rates rise. On the other hand, long-term debt funds may not perform well when
the repo rate goes up. Bond prices fall as interest rates rise, which can lower the returns for
long-term debt fund investors.
When it comes to equity investments, the connection between repo rates and stock prices is
more complicated. Generally, when the repo rate rises, borrowing becomes more expensive,
which can lead to a reduction in corporate profits. This tends to hurt stock prices, especially for
capital-intensive sectors like infrastructure and capital goods.
However, certain sectors such as IT and FMCG, are less sensitive to changes in the repo rate,
and their stock prices may not be as affected by rate hikes. With the repo rate currently at 6.5%,
the impact on equity markets is expected to be minimal in the short term, but it’s something to
keep in mind over the long term.
For real estate and home loans, the repo rate has a direct effect. When the RBI changes the
repo rate, home loan interest rates usually change too. If the repo rate goes up, home loan rates
typically follow suit, which means higher EMIs for borrowers.
With the current repo rate at 6.5%, home loan EMIs are not expected to change in the near
term, but any future repo rate hikes could result in higher borrowing costs for home buyers. On
the other hand, a decrease in the repo rate could make home loans cheaper and reduce
monthly EMIs, which could boost demand in the real estate sector.
In December 2024, the RBI held the repo rate at 6.5%, signaling that they are looking to
maintain stability in the economy. Along with this, the RBI also reduced the Cash Reserve Ratio
(CRR) by 50 basis points, which increased liquidity in the banking system by about Rs 1.16 lakh
crore. This move could help reduce borrowing costs and make credit more accessible, which in
turn can have a positive impact on investments across various sectors.