RBI rate cut: What it means for your money and how you should invest now

Business Standard

2 days ago

India's central bank, the Reserve Bank of India (RBI), on Friday made a bold move: it cut its key interest rate (the repo rate) by 50 basis points (bps)—from 6% to 5.50%. This was unexpected, and it's already creating a ripple across loans, savings, and investments.
What is the repo rate and why does it matter?
The repo rate is the interest rate at which RBI lends money to banks.
When the repo rate is cut, banks can borrow cheaper, which means they usually:
Lower loan interest rates (good for borrowers!)
Lower fixed deposit (FD) rates (bad for savers)
So a rate cut like this helps boost spending and borrowing, but reduces returns for those who rely on safe savings like FDs.
What happened on Friday?
RBI cut the repo rate by 50 bps (that's 0.50%).
It also cut the Cash Reserve Ratio (CRR), giving banks even more money to lend.
At the same time, RBI moved from an 'accommodative' to 'neutral' stance, meaning it's done cutting rates for now — unless the economy slows further.
What does it mean for investors?
1. Loans are Cheaper
Great news if you have a home loan or plan to take one. Your EMIs might drop by ₹300–₹600 or more, depending on your loan size.
2. FD Rates Will Fall
Banks will cut fixed deposit interest rates. If you were earning 7% earlier, expect 6.3% or lower in the next few weeks.
3. Future Bond Returns May Be Lower
Bond prices have already risen after the RBI move. There's less room for further gains, unless the economy weakens further.
"Reduction in cost of funds (better NIMs) could mean lowering of borrowing rates thus reducing EMIs and leaving more surpluses in the hands of consumers that could in part aid discretionary spends," said Yogesh Kalwani - Head of Investments, InCred Wealth.
Lower policy rates typically lead to higher bond prices (since yields fall). But because the rate cut was large and already widely anticipated, the bond rally has largely played out, limiting potential for future gains
The 10-year government bond yield briefly touched 6.10% post-announcement but settled around 6.28%, reflecting uncertainty over future rate moves
The market is now broadly anchored in a range of ~6.0%–6.3% for the 10-year yield unless economic conditions change dramatically
Due to the policy rate cut and the proposed the CRR cut, short-term rates have come down by 15-20 bps.
'So, the impact is positive on short-term rates. But the long-term 10+ year yield has gone up a few bps, because there is a change in the stance to neutral, which indicates that there's isn't much likelihood of any further rate cuts. With interest rates at 5.5 percent, the market is already anchoring the 10-year yield about 75 bps above this, at about 6.25 percent. I am expecting 10-year yield get closer to 6 percent before it bottoms out,' said Mahendra Kumar Jajoo, Chief Investment Office–Fixed Income, Mirae Asset Mutual Fund.
Here's where it gets interesting:
Although a rate cut usually boosts bond fund returns, markets often react in advance. That's what's called 'pricing in the news.'
As Dharan Shah of Tradonomy.AI explains:
'Bond prices have likely already adjusted to reflect the rate cut. So the opportunity for major price gains is gone.'
In simple terms:
If you were already invested in debt funds or long-duration bonds, you probably saw your fund NAV rise.
But if you're investing now, there might not be much more to gain — unless RBI cuts rates again.
However, with the RBI now shifting from an 'accommodative' to 'neutral' stance, further rate cuts look unlikely in the short term. So, bond prices may not see big spikes anymore.
"The aggressive frontloading of monetary easing, along with the change in monetary policy stance from 'Accommodative' to 'Neutral,' has increased expectations in the bond market that the RBI/MPC are either at the end or near the end of the rate-cutting cycle.
While we believe the MPC will retain the status quo on policy rates over the next couple of quarters, further rate cuts cannot be ruled out if the growth trajectory does not pan out as per the RBI's forecast.
Currently, the abundant liquidity and the attractive carry will be favourable for the shorter end (1–5 years) of the corporate bond curve, as spreads remain attractive in that segment. Some of the liquidity infused can be mopped up by the maturity of the short USD forward position of the RBI, though liquidity will remain in surplus and the SDF rate is likely to be the operational rate.
We expect the yield curve to continue to steepen incrementally with elevated global bond yields and limited room for further monetary easing. The 10-year bond yield is likely to trade in a range of 6%–6.50% over the course of the next six months, with only a material downside to the growth and/or inflation outlook (which increases the prospects of further rate cuts) pushing the 10-year yield towards 6%," said Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund.
So, what is the catch with debt funds now?
Many new investors are eyeing debt funds, especially long-duration funds, hoping to benefit from the RBI's surprise rate cut.
But experts warn:
'The bond market has already priced in the cut,' said Shah. 'The scope for price gains is limited unless the RBI cuts again, which seems unlikely for now.'
Even the 10-year government bond, which briefly dipped to 6.10%, rebounded to 6.28% as markets processed the RBI's shift to a neutral policy stance.
So what does this mean?
If you're already in debt funds, especially those with long-term bonds, hold on and enjoy the gains.
If you're entering now, you may want to stick to short- or medium-duration funds, or corporate bond funds that still offer better 'carry' (regular interest income).
"Investors with a 12–18 month investment horizon can look at corporate bond funds, as we expect corporate bond spreads to narrow owing to abundant liquidity and attractive carry. Investors with an investment horizon of 6–12 months can consider money market funds, as yields can continue to drift lower in the 1-year segment of the curve," said Pal.
How should you invest now?
If you are a conservative investor, your best bets now are:
Short-Term Debt Funds / Money Market Funds: These invest in high-quality, short-term bonds. You get slightly better returns than FDs, with similar safety.
If You're a moderate investor (Comfortable with Some Risk)
Your best options:
Corporate Bond Funds
Offer higher returns than govt bond funds by taking a bit more risk.
Choose funds investing in top-rated (AAA) companies.
Dynamic Bond Funds
These funds adjust to market conditions, so they can take advantage of both short- and long-term opportunities.
Avoid:
Long-term gilt funds — the rally may be over, and gains will slow.
If You're a Growth-Seeking Investor (Higher Risk Appetite)
You may look for higher returns, even if there's some risk.
Options to explore:
Hybrid Funds (Debt + Equity) – Good mix of safety and growth.
Short-Term Equity Funds – If you believe the rate cuts will spur economic growth and corporate earnings.
Credit Risk Funds – Higher yield potential, but go with caution and only if you understand the risks.
"We suggest allocating upto 45% of fixed income portfolio towards accrual-oriented strategies. Consequently, we now revise our allocation to dynamic / long duration strategies upto 20% of fixed income portfolio. Credit environment continues to remain stable, and credit spreads remain attractive. Thus, balance 35% allocation of fixed income portfolio is suggested towards high yielding assets (bonds /funds," said Kalwani.