How changes in Repo Rates affect Stock Markets?

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Have you ever wondered about the impact of changing repo rates on stock markets? Is it negative or positive for equity investors if the repo rate by Reserve Bank India (RBI) increases?

In December 2022, the RBI increased its repo rate by 35 basis points (bps) Since May, the RBI has now increased the key rate by 225 bps in FY23.

The general implications of rising repo rates are that EMIs go up, and demand for passenger vehicles, real estate, and capital goods goes down but have you ever thought about how equity investments and other stock market investments are impacted by changes in repo rates?

Well, let us discuss in detail how repo rates affect the stock market through this write-up.

What is Repo Rate?

Let us first understand the meaning of repo rate.

Around the globe, central banks control interest rates. Meanwhile, the Reserve Bank of India controls the repo rate in India. Basically, this is the required interest rate that the RBI lends to business banks. This rate becomes the standard rate. Based on this benchmark rate, commercial banks determine the borrowing rates for individuals and businesses.

So, it can be said that Repo Rate is a benchmark interest rate at which the Reserve Bank of India (RBI) lends money to every commercial or retail bank across the country as a short-term loan. Any shift in the repo rate determines the relative shift in rates for the loans and deposits.

However, it is also important to understand the concept of Reverse Repo Rate. It is a short-term deposit rate offered to scheduled banks, i.e., the rate at which RBI borrows money from banks.

The main function of these rates is to bring about changes in the money activity in the economy.

Impact of changes in Repo Rates on Stock Markets

Interest rates and the stock market are inversely related. With every increase in the repo rate, the stock markets are immediately affected.

This indicates that an increase in the repo rate causes businesses to reduce their expenditure on expansion. It inevitably slows down the growth, impacts profits and future cash flows, thereby allowing the stock prices to drop. If other businesses do the same, markets will inevitably decline.

For Example- If it is anticipated that there will be a rate hike in February 2023 and RBI announces that it will not hike the rate in February 2023, then it will lead to a market cheer and thus, markets would rise.

In other words, it is safe to say that an increase in interest rates signifies an increase in savings and this means that there will be a reduced flow of capital to the economy. This causes a downfall in the stock market and vice-versa.

Typically, the market would respond favourably to a reduction in the repo rate. It happens because banks will lower their lending rates as a result of a decrease in the repo rate. Consequently, the average person will have more money to spend. As a result, investors will invest in the businesses that leads to an increased demand and share prices.

Another perspective is that when banks lower interest rates, they simultaneously lower deposit rates. Given the poor deposit rates, investors would choose to invest some money in equities to get higher returns.

In most cases, a decrease in the repo rate will typically prompt the markets to respond favourably, since it shows that the government is controlling inflation and the fiscal deficit. 

When repo rate is increased, fixed income securities become attractive. It happens because RBI is indirectly encouraging people to invest in bonds, fixed deposits and other fixed income instruments (like debt mutual funds, post office deposits and bank deposits) as it generates business and pushes the Gross Domestic Product (GDP) growth of the country.

Thus, when repo rate goes high, investors will gradually move funds out of equity and move to fixed income assets.

Impact of changes in Repo Rate

It is important to note that all sectors are not equally affected by the reduction in the repo rate. For instance, because of the significant capital or debt that capital-intensive companies have on their book, such as real estate, capital goods, infrastructure, etc., such companies are more susceptible to these changes. On the other hand, equities in fast-moving consumer goods (FMCG) or Information Technology (IT) often see less impact.


To conclude, it makes sense to say that the direct effect of changes in the repo rate is straightforward.

As the repo rate rises, it makes borrowing money from a bank a non-lucrative affair. This, in turn, slows down the investment and money supply in the market because the purchasing power of people comes down.

It is generally very inevitable that if the purchasing power reduces, people would have lesser money to invest in stocks. Also, investors have to deal with the rising inflation rates. Thus, investments in stocks witness a downward trend.