Markets Rally as RBI Rate Cut Sparks Broad-Based Optimism

Indian equity markets posted strong gains on 5 December 2025, immediately after the Reserve Bank of India (RBI) announced a 25 basis-point cut in the repo rate, bringing it down to 5.25%. The move, which marks the start of a new monetary easing cycle, triggered a sharp improvement in investor sentiment.
According to Business Standard, the Sensex and Nifty 50 closed significantly higher, led by banking, real estate, auto, and rate-sensitive stocks.

Markets React Positively to Policy Easing

Rate-Sensitive Sectors Lead the Rally

The rally was driven by expectations that lower interest rates will reduce borrowing costs, improve corporate profitability, and boost consumption. The Times of India reported that investors welcomed both the repo rate cut and the RBI’s plans to inject liquidity through ₹1 lakh crore OMO purchases and a USD/INR forex swap.

Banking stocks saw strong gains due to anticipated improvement in credit growth. Realty and automobile stocks surged on expectations of lower EMIs and higher demand.
Foreign portfolio investors (FPIs) also turned net buyers for the day, reflecting renewed confidence in India’s macroeconomic direction.

Broader Economic Implications

Capital Formation, Investor Confidence, and Growth Momentum

A buoyant equity market is likely to strengthen India’s medium-term economic outlook. Improved market valuations can:

• Enhance capital formation as firms find it easier to raise funds,
• Boost investor confidence, especially in infrastructure and manufacturing, and
• Support government financing through stronger market appetite for bonds and equities.

However, analysts caution that while monetary easing supports short-term growth, it may also raise concerns regarding sustained fiscal health, global volatility, and future inflation trajectories.
If demand accelerates too rapidly or global commodity prices rise, inflationary pressures could reappear, requiring careful policy balancing.