Last updated on July 19th, 2022 at 08:49 am
How RBI Monetary Policy affects Indian Stock Market?
Monetary policy is the process to control the money supply in the economy by making interest rate decisions in order to achieve higher economic growth and maintain price stability. The policy is
draft, announce, and implement by the central monetary authority which in India is Reserve Bank of India (RBI).
The monetary policy is to address the management of money supply and interest rates in order to achieve macroeconomic objectives like controlling inflation, growth, liquidity, and consumption.
In short, the monetary policy is specifically designed to maintain the economic stability of the country. Thus, many economists, research analysts, investors, traders, and financial experts eagerly
await the monetary policy announcements and outcome of the Monetary Policy Committee (MPC) involving interest rate decisions.
The monetary policy process by the RBI impacts the important aspects of the economy such as gross domestic product (GDP) growth rate, unemployment rate, and other economic & sector-
specific aspects.
Any development or announcement of monetary policy has an impact on the overall health of the economy, sectors, and even the stock market. Here we’re going to discuss how RBI monetary policy affects Indian stock market?
IMPACT OF RBI MONETARY POLICY ON THE INDIAN STOCK MARKET
It has often seen that whenever the RBI Monetary Policy Committee announces its monetary policy, the future economy and stock market of the country influenced by it. The stock market does
influence by the monetary policy but it is for the short-term, on a temporary basis. It is more like a knee-jerk reaction to the degree of the change in interest rate with respect to the expectations.
So, if there is a rumor of increasing interest rates by 1% or 0.5%, and RBI does exactly the same then the stock prices won’t be impacted much from the monetary policy announcement since the
RBI does exactly the same.
However, the stock prices will be impacted when the market is expecting RBI to raise the interest rates by 0.5% and instead of rising RBI cuts of the rates or does nothing at all.
So, in short, it’s all about the expectations and actual results.
You may be questioning then how RBI Monetary Policy affects the economy and markets of a country?
Well, truth to be told – interest rate is not the only factor that affects the economy and markets.
The biggest impact of the interest rate on the stock market is on the intrinsic value of stocks. Not only the higher interest rates reduce the intrinsic value of the stock but also reduce the value of
future cash flow.
If we talk about the first bi-monthly monetary policy which held today of the financial year FY 2019-20 then in this policy meet the Monetary Policy Committee (MPC) cut the repo rate back-to-
back by 25 bps and changed the policy stance to neutral.
This Repo rate is the rate at which central bank (RBI) lends money to the commercial banks. With this, the citizens will get loans at lower interest rates and have more purchasing power in the
future. When that happens, people will be able to purchase big products and services like major appliances and auto-vehicles among others. When that happens, the big companies will have
increased earnings which will boost the intrinsic value of stocks, and vice-versa.
Hope, this information helped you in understanding the impact of RBI monetary policy on the stock market. The author of the article is Nisha Sharma. Nevertheless, if you have any query or would like us to add something up then don’t forget to mention in the comment section below or write to us on info.financepost@gmail.com or advisornishasharma21@gmail.com .
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