From Repo Rates to Stock Prices: How RBI’s Monetary Policy Affects Your Finances and the Stock Market

The change in interest rates not only impacts the stock market but also personal life. To understand how it affects both, read the complete article.

The Reserve Bank of India (RBI) frequently holds meetings to announce adjustments in policy rates, including the repo rate and reverse repo rate. Alongside these announcements, the RBI provides detailed commentary on the state of the Indian economy and the rationale behind its decisions. Bankers, investors, and economic enthusiasts closely watch these changes, as they have significant repercussions. These policy adjustments influence key stakeholders and have a broader impact on the entire economy and everyday citizens.

Today, RBI Governor Shaktikanta Das announced the latest RBI Monetary Policy, where he has kept the interest rate unchanged at 6.5 per cent.

Monetary Policy:

Monetary Policy refers to the actions taken by the central bank to regulate the supply of money and credit in the economy. It does so to achieve the country’s macroeconomic objectives such as GDP, Growth, and Inflation. The objective is to maintain price stability along with balancing economic growth.

It is formulated by its Monetary Policy Committee (MPC), which comprises 6 members, including 3 members from the RBI and 3 external members appointed by the government. The committee holds meetings every 2 months to review the current economic situation and decide on the appropriate policy stance.

The objective of Monetary Policy

The objectives of India’s monetary policy are designed to promote economic growth while maintaining financial stability. Key goals include keeping inflation low and stable to support economic health and development projects. The RBI aims for equitable credit distribution across all sectors and socio-economic groups, manages credit growth to avoid disrupting economic output, and promotes productive investments while limiting unnecessary ones. The policy also focuses on preventing overstocking and financial distress by managing inventories, boosting exports and trade, and enhancing financial system efficiency through deregulation and new market instruments. Additionally, the RBI seeks to increase flexibility and competition in financial operations while ensuring discipline and prudence.

Impact of Monetary Policy:

Interest Rates: When the RBI raises the repo rate, it becomes more expensive for banks to borrow money, leading to higher interest rates for loans and mortgages. For instance, if the repo rate is increased, the cost of home loans for consumers might rise, potentially reducing home purchases and affecting housing market activity. Conversely, a lower repo rate makes borrowing cheaper, which could encourage spending and investment. For example, a lower repo rate might result in reduced car loan rates, increasing car sales and consumer spending.

Inflation: When the RBI buys government securities, it injects more money into the economy, which can lower borrowing costs and boost spending. For instance, an increased money supply might lead to higher consumer spending on goods and services, but if demand exceeds supply, it could drive up prices. Conversely, selling government securities reduces the money supply, making borrowing more expensive and helping control inflation. For example, reducing the money supply could stabilize the rising prices of everyday goods by curbing excessive demand.

Exchange Rates: Higher interest rates can attract foreign investors seeking better returns, leading to an appreciation of the currency. For example, if India’s interest rates rise, the Indian rupee might strengthen against the US dollar, making imports like oil cheaper but potentially hurting Indian exporters by making their products more expensive abroad. Lower interest rates, conversely, may weaken the currency, which could boost exports by making Indian goods cheaper for foreign buyers, though it might make imports more costly.

Stock Markets: Changes in RBI policy rates can significantly impact stock markets. Higher interest rates can lead to reduced business profitability, as borrowing costs rise, potentially leading to lower stock prices. For instance, an increase in rates might negatively affect companies that rely heavily on debt for expansion. Conversely, lower interest rates can boost business profitability by reducing borrowing costs, potentially leading to higher stock prices. For example, tech companies benefiting from lower rates might see an increase in their stock values due to lower financing costs for innovation and growth.

Disclaimer: The article is for informational purposes only and does not constitute investment advice.