Impact of RBI's 35 bps rate cut: What it means for middle-class, economy and stock markets | EXPLAINED

In a surprise move, RBI has today taken an unconventional step. It has cut repo rate by 35bps in its third bi-monthly monetary policy. The step is intended to kickstart the economy. The central bank showed an urgent need to reduce the cost of capital in the economy to boost the investment cycle from the private sector. The six-member monetary policy committee headed by RBI Governor Shaktikanta Das, decided to reduce key repo rate by 35 basis points to 5.45 per cent from 5.75 per cent on Wednesday with immediate effect. 

The repo rate now stands at the lowest level in almost 10 years. The MPC has also decided to maintain the 'accommodative' stance in the August's meeting. 

Here is what experts are saying about what the rate cut's impact on economy, credit structure, stock market and middleclass people will be:

Decision will improve liquidity and boost economy

Rajiv Singh, CEO, Karvy Stock Broking told Zee Business Online, ''While we were hoping 50 bps rate cut, the RBI has chosen unconventional cut of 35bps which is mildly positive for the market. However, RBI cutting its estimation of GDP growth rate below 7%, while widely expected, may not go down well with the market in short term. Overall this is an accommodative policy and in tune with other developed and emerging market trends. Certain other macro prudential measures like enhancement of credit limit to individual NBFC to 20% from 15% of a Bank's Tier I capital is good.''

''The RBI has pointed out that while transmission of rates has occurred through money market, banks are yet to pass on the rate cuts to real economy. Overall, this is a good policy and should help improve liquidity, consumption and demand scenario in the economy albeit with a lag. We continue to expect further cuts from the RBI, as based on the current inflation projections, there is further room for RBI to cut rates and boost the economy,'' Singh added. 

Stock market to recover in short term

Mustafa Nadeem, CEO, Epic Research said that, ''Markets in the short term may rejoice and see some recovery to upper levels of 11100 - 11200 as far as 10750 holds. But it is important to note that we are in a secondary trend which is bearish and the bulls at present have the least chance of turning the trend quickly. Going forward the pressure at higher levels may continue to maintain its bearish momentum It is now how global markets move and what are the cues there.  If 10,750 is taken out on a closing basis we may see a trend continuation to much deeper levels of 10,200 - 10,300 but this move may be seen as a short term relief since the market is now dancing to the tunes of the global markets.''

Growth in real state sector

''The RBI has pumped lot of liquidity into the banking system which should make a clear pledge to keep the banking system glow with liquidity. While the cost of capital is headed lower, we trust future commencement will be in baby steps, motivated by lowering of inflation expectations, a global recession notwithstanding. It will definitely spur growth for the real estate sector specifically,''said Ashok Mohanani, Chairman, EKTA World.

''There have been many meaningful interventions by the government and regulator which has provided a positive boost to the home buying sentiment among the potential homebuyers. Rate cuts will guarantee affordability in terms of home loans and thus lowered EMI, lower GST, tax discount for the middle class as per as interim budget. Furthermore, we are also hopeful that the financial institutions will reduce the interest rates on construction finance,''Mohanani added. 

Cheaper loans will boost up investment cycles

Commenting on credit structure, Parth Mehta, Managing Director, Paradigm Realty explained, ''This shall help faster transmission of rate cuts, as the banks are already standing with excess liquidity and now will be compelled to deploy the same in good assets in the form of cheaper consumption of finance linked to auto loans, home loans, personal loans etc. As the credit growth is very important for inducing investment cycles to return back, the transmission of aggressive rate cuts by banks should follow and spur credit growth propelling consumer spending to bring back healthier economic growth.''