Monetary Policy by RBI Repo Rate, reverse repo rate, Cash reserve

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Marketopedia / Stock Markets Basic / Monetary Policy by RBI Repo Rate, reverse repo rate, Cash reserve

Trading and investing based solely on company-specific data may not be enough. Investors must consider outside elements that could affect stocks and the overall market, including economic and non-economic events. Acquiring insight into what drives the markets is also essential.

In this chapter, we will explore the effects of certain occurrences on the share market.

Monetary Policy

The Reserve Bank of India (RBI), India’s central bank, utilises monetary policy to control the money flow in the economy by adjusting interest rates. In the same way, other countries’ central banks, like the European Central Bank or US Federal Reserves, determine what their respective interest rates should be. By changing these figures, a central bank can influence how much money is available in the regular economy.

The RBI must tread a delicate path between growth and inflation whilst setting interest rates. High borrowing costs (especially for corporations) can mean the economy is slow when businesses are unable to access credit easily.

The availability of inexpensive credit allows businesses and consumers to access more funds, resulting in increased spending. Higher demand for goods and services can drive up their prices, which may eventually lead to inflation.

The RBI needs to analyse all economic variables before making decisions regarding key rates. Such an imbalance can easily cause turmoil in the economy, and it is important to monitor the following rate adjustments made by the RBI:

Repo Rate 

Banks can take advantage of loans from the RBI. This rate, known as the Repo Rate, determines banks’ borrowing costs. When this rate is higher, it causes economic growth to slow down. 

Finding the latest Repo Rate and other rates through RBI’s website can be easily done. As a result, many markets don’t respond favourably to increases in the Repo Rate as it has negative implications for economic expansion.

Reverse Repo Rate 

The Reverse Repo Rate is the rate at which the Reserve Bank of India (RBI) borrows from banks. It can also be thought of as the deposit rate given to other banks, when they park their funds with RBI. 

These banks are confident that default will not occur, which makes the given rate comparatively low. However, money supply in the economy  decreases when money is deposited with the RBI instead of into corporate sectors.

An increased Reverse Repo Rate influences a contraction of money circulation in the economy and another way of limiting surpluses in circulation is through policies enforced by the central bank, demanding higher deposits from banks.

Cash reserve ratio (CRR) 

A bank must keep funds with the Reserve Bank of India. An increase in CRR results in less money being circulated in the economy, which can have a negative impact.

The Monetary Policy Committee regularly gathers to assess the state of the economy and decide upon key rates, making it vital for active traders to stay informed about the event. Those that react swiftly to rate decisions can benefit from interest-rate sensitive stocks from multiple industries, such as banking, automotive, housing finance, real estate, and metal works.