Today's rate cuts spurred the stock market into its biggest gain in eight months, drove the rupee higher, and brought a festive cheer among corporate India.
Here are five ways this rate cut might affect you:
1. Cheaper loans: Banks will take a call to pass on the repo rate cut to consumers. Repo rate is the rate at which the Reserve Bank of India lends money to commercial banks. But it will be of limited impact, because the cut is just 25 basis points. For the average person in debt because of a car or home loan, life will pretty much remain the same.
2. Holds promise of further cuts: The key element in today's cut is that Rajan has signalled he is open to more. Rajan said in a statement the government has committed to sticking to a fiscal deficit target, and that was one reason for cutting rates earlier than expected. Rajan will wait to see the nature of the budget, and if Jaitley sticks to policies to lower the fiscal deficit. If that happens, another rate cut might follow.
3. Incentive to reform: India is well-placed to enact bold reforms because oil prices are low, inflation is contained, and foreign investors are bullish. The World Bank said yesterday that India might outpace China's growth in the next two years. And now with this rate cut, the economy will get further incentive, even if the quantum of cut is less than industry's expectations of 50 basis points. This is the best time to go for reforms that might will spur growth and improve crumbling infrastructure. Sustained growth leads to higher income for the average person, and more jobs.
4. Inflation battle won, for now: Inflation was a huge problem during the UPA's second stint in power, and had averaged close to 9 percent in the last two years, which contributed to the Congress government's unpopularity. Raghuram Rajan made controlling inflation his focus when he came aboard in 2013, and has been successful. He resisted demands of politicians for rate cuts earlier, and finally did so today after world commodity prices such as oil fell to new lows, and inflation in India reached its lowest point in last five years. Lower inflation means you get higher value for your money.
5. Good for stock market investors: The benchmark Sensex surged the highest in over eight months after news of the rate cut. Stocks of infrastructure, automobile and banking firms rose. This might be a good time to go for stock investments in areas you are confident about.