Market reaction is normally with respect to expectations. The market was expecting a rate cut of 35 bps to 50 bps and was disappointed when only 25 bps rate cut was done. The 25 bps rate cut was already factored into the market prices and the markets were looking for something more. But the reaction on 6th June was not only because of the lower rate cut but also because the downgrade of Dewan Housing by the rating agencies had created panic about the thousands of crores that banks and mutual funds had lent to these groups.

Normally, a cut in repo rates, reduces the yields on bonds. That means the bond prices appreciate and that results in capital gains on bonds and also for bond fund holders. A rate cut is also positive for equity investors in two ways. Firstly, equity valuations are done by discounting future cash flows. With rates cut, the cost of capital comes down and thus discounting will happen at a lower rate. This will be positive for valuations and also for stock prices. Secondly, fall in yields will result in fall in cost of funds and companies will have to pay lower interest on their debt. This will make companies healthier and make valuations better. But in the short term it is all about sentiments in the market and nothing else.