A central bank's policy rate is the interest rate at which it lends money to commercial banks overnight. In India, this is called the repo rate, set by the Reserve Bank of India. Think of it as the wholesale price of money: when banks themselves borrow at a certain rate, they price all the loans they extend to businesses and households above that level to cover costs and earn a margin. This one number therefore acts as an anchor for interest rates across the entire financial system — from home loans to corporate bonds to savings deposit rates.

When a central bank moves its policy rate, the effect does not stay in the meeting room — it travels through bonds, loans, currencies and equity valuations across the entire economy.

The transmission works in steps. When the RBI raises the repo rate, borrowing becomes more expensive for banks, who in turn charge higher rates on loans to companies and individuals. Higher loan costs can slow business investment and consumer spending, which tends to cool economic activity and, over time, bring down inflation — which is often the very reason a rate hike is implemented in the first place. The reverse is equally true: a rate cut makes borrowing cheaper, can stimulate spending and investment, and tends to support economic growth. Today's session illustrated this chain clearly. Brent crude rose sharply to USD 111.51 per barrel, raising the prospect of higher imported inflation in India. Bond markets reacted quickly, with the benchmark government bond yield climbing above 7.45%, as traders priced in the possibility that elevated inflation could prevent the RBI from cutting rates, or might even require further increases.

Equity markets feel the effect through a related but distinct channel. When bond yields rise, the returns available from relatively safe government bonds become more attractive compared with the uncertain returns from equities. This can prompt some investors to shift money from stocks to bonds, putting downward pressure on share prices. Additionally, higher borrowing costs squeeze corporate profit margins, particularly for companies carrying significant debt or planning large capital expenditures. The NIFTY IT index's 1.05% decline today reflects a global dimension of the same logic: rising rates and questions about the durability of AI-related earnings growth weighed on technology valuations internationally as well. Understanding how a policy rate connects to bond yields, equity prices and currency movements helps explain why a single number announced in a central bank meeting can move markets well beyond the banking sector.