Sai Intraday Tips Has Expert Technical team has tried to explained the RBI policy in detail in lucid language and has also discuss how the changes in RBI policy affect our nse stock market. Every Investor or traders should know about RBI policy before he start investing or trading in share market in India.
What is RBI Policy?
The RBI through its monetary policies like Bank Rate, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) can increase/decrease the credit available to the banks. RBI also used Repo rate and Reverse Repo rate to achieve its objective.
Bank rate is the rate at which banks borrow money from the central bank without any sale of securities. This rate is fixed by RBI and its its changes as per the demand and supply of money in the Indian economy. Generally it is borrowing money from someone and paying interest on that amount. Bank Barrow from the RBI to give Loans to their customers.
Cash Reserve Ratio (CRR)
Banks in India are required tohold a certain proportion of their deposits in the form of cash.. The commercial banks have to keep reserve as a deposit with the RBI. RBI uses CRR either to drain excess liquidity or to release funds needed for the growth of the economy from time to time. Increase in CRR means that banks have less funds available and money is sucked out of circulation. Cash Reserve Ratio is a set by the RBI and its is changed as per the requirements of the economy
Statutory liquidity ratio
Statutory liquidity ratio also called as SLR is an reserve requirement that the banks in India should maintain in the form of gold or government approved securities before providing credit to their customers in India. This SLR regulates the credit growth in India.
Repo rate is the rate at which the RBI lends short-term money to the banks against the govt approved securities. If RBI wants to limit the credit growth in the economy, it can make the borrowing expensive for the bank by increasing the repo rate. Similarly, if bank want to expand the credit in the economy, it wants to make it cheaper for banks to borrow money, by reducing the repo rate
Reverse Repo Rate
Reverse Repo Rate is a monetary policy instrument which can be used to control the money supply in the country. Reverse Repo rate is the rate at which banks deposit’s their short-term excess liquidity with the RBI. The banks use this tool when they feel that they are stuck with excess funds and are not able to invest anywhere for reasonable returns.
Features of RBI Policy
- A RBI takes in the account low inflation, domestic factors and global factors before making any changes to the monetary policy.
- Stock Market can react Strongly or may not react at all to the Changes done in RBI Policy
- Interest Charges by banks on Housing Loan, Personal Loan, Vehicle Loan, Gold Loan Depends on the RBI Policy
Affect of changed in CRR and SLR on Stock Market
CRR and SLR : If RBI decides to increase the percentages of CRR & SLR the available credit at the disposal of the banks goes down. This in turn has an effect on the credit available to the public because they can borrow less. The increased cost of borrowing also hits the borrower. Due to lack of available credit, there is less demand of goods & services, which ultimately has an impact on the profit of companies. This has a negative impact on the prices of the stocks in the nse market.
It is difficult to predict to what extent or how the stock market will react to the rbi policy on intraday basis or long term basis, but it does bring about a negative/positive buzz in the financial community.
Affect of changed in Repo Rates & Reverse Repo rates on Stock Market
If the repo rate or the bank rate is increased, bank has to pay more interest to the central bank. So in order to make a profit, banks in turn increase the interest rate at which they lend money to the customer. This dissuades the customers in taking credit from banks, leading to a shortage of money in the economy and less liquidity.
An increase in Reverse repo rate means that the central bank now pays more interest to the banks for depositing their money with it. This results in banks transferring more funds to the central bank to earn attractive interest. As a consequence, money is drawn out of the banking system, leading to a shortage of money in the economy and less liquidity, thereby controlling inflation.
For example If the RBI hikes REPO by 25 basis points, the rate of interest on your housing loan will be hiked by 0.25%. On the similar lines, interest rates on Personal loans and Vehicle loans also increase on fresh loans. Banks may or may not hike these rates for existing loans.