Many time I heard from many of my friends and customers that stock market or share market would move up, if RBI change the policy rates. What does it mean ? What are the inter relation between RBI Policy rates, Stock market movement and inflation.
I have defined it in easy step to help you guys ?
What are RBI Policy Rates ?
First of all, let’s know about the key policy rates of RBI which regulate the market. They are :
Cash Reserve Ratio or CRR : This is the liquidity regulator of Indian banking system, in general it is defined as the portion of deposits banks must keep aside. It means all the banks in India need to keep certain amount of funds with RBI.
This is the tool which is used by RBI to regulate the position of liquidity in the banking system.
Repo Rate :
Repo rate is the rate at which Indian banks borrow money from RBI. This is use when due to high growth demand banks have sometime the shortage of funds , at such moment they can borrow it from RBI.
If Repo rate get reduced, it means banks to get money at a cheaper rate. Where as the increase in repo rate make borrowing from RBI expensive.
Reverse repo rate :
Sometime RBI needs money from the Indian Banks, such lending to RBI is the safest mode with good interest rate. It means more the interest rate better the income for banks. An increase in Reverse repo rate force banks to lend more funds to RBI. Such lending drain out the money from the banking system.
What is Inflation ?
Inflation in simple term define as the Increase in price of the goods. More the Inflation, lower will be the demand hence the growth.
How Do Chance in Policy rates effect the Stock Market ?
Banking is the key sector which regulate the growth of many sector like Auto, reality, consumer durable etc. Slight lower movement in the banking sector pulls down the growth of dependent sector and finally the growth of the country.
When RBI reduces the CRR, it means Individual banks are required to keep less money with RBI . They will be having surplus money with them now to lend in the market. It help bank to look after more lending with increase in income.
Under such circumstances Stock market generally move up due to chances of growth and increase in demands of depending sector like Autos, Real Estate etc. Where as reverse incase of moving down of key rates.