As we all know REPO and reverse REPO rates are the rates at which short term borrowing and short term advances are made between the Commercial Banks and Reserve Bank of India. The recent reduction in the REPO rates indicates that Reserve Bank of India has the intention to cautiously reduce the cost of Financing in the economy. The recent reduction in the REPO rate will certainly encourage the entrepreneur to borrow and will also result into more spending by the consumers due to its cascading effect, However, it will directly boost the spending on infrastructure and increase large capital expenditures.

This move indicates that the RBI over a period of time is likely to reduce the bank rate and follow an easy money policy. This would lead to reduction in the rate of interest which is currently being offered by the Bankers on its fix deposits and other savings accounts.

All these efforts are towards reducing / controlling the inflation. Interest rates reduction play very important role on supply side by reducing the cost of supply and simultaneously by encouraging public spending since savings are made less attractive. Hence, this move indicates that the RBI is confident about inflation being in control.

Though, changes in REPO rates are considered to be cautious moves. They indicate the direction in the medium term that RBI is likely to take and indicates that the RBI is confident that boosting of the demand will not cause further inflation and the industry will catch the message and will be encouraged to increase supply through more investments. Naturally, therefore, the stock market will also be taking as a positive move and will reflect in a gradual rise in the stock indexes.