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Impact of New RBI Monetary Policy on the Stock Market

stock market
11 Oct 20236 mins readBy MOFSL

Introduction:

The Reserve Bank of India (RBI) plays a pivotal role in shaping India’s economic landscape through its monetary policies. These policies are curated to manage inflation in the country, encourage economic growth, and maintain financial stability. One of the most significant tools at the RBI’s disposal is adjusting the repo rate.

The RBI adjusts the repo rate occasionally to maintain financial stability and control inflation. However, any change in the repo rate directly impacts most investment instruments in India, including the stock markets.

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On Friday, 6 October 2023, the incumbent RBI governor, Mr Shaktikanta Das, announced the monetary policy updates for the third quarter of the Financial Year 2023-24. Let’s explore the highlights of the RBI’s monetary policy announcement and their impact on the stock market.

What is the repo rate?

Before you delve into the details of the RBI’s monetary policy changes, you must learn the repo rate. The repo rate is the rate at which the central bank in a country (the RBI in India) lends money to other commercial banks and non-banking financial institutions.

The RBI uses the repo rate to control inflation in India. When inflation seems out of hand, the central bank increases the repo rate, propelling banks to borrow at a higher rate. It subsequently reduces the money supply in the market, thus helping in managing inflation.

RBI’s new monetary policy updates

The RBI announced its new monetary policy updates on Friday, 6 October 2023. On the expected lines, the repo rate has been kept unchanged at 6.50%. This means that the Standing Deposit Facility (SDF) rate also remains unchanged at 6.25%, and the Marginal Standing Facility (MSF) rate remains at 6.75%.

Other highlights of the RBI’s new monetary policy updates include:

  • GDP Projections

The RBI has forecasted the real Gross Domestic Product (GDP) growth for the financial year 2023-24 to be 6.5%. The GDP forecast for the second, third, and fourth quarters of FY24 stands at 6.5%, 6%, and 5.7%, respectively. The GDP forecast for the first quarter of the financial year 2024-25 stands at 6.6%.

  • Inflation Forecast

The RBI has forecasted the Consumer Price Index (CPI) inflation rate for FY24 to be 5.4%. The CPI inflation forecast for the second, third, and fourth quarters of FY24 stands at 6.4%, 5.6%, and 5.2%, respectively. The CPI inflation forecast for the first quarter of the financial year 2024-25 stands at 5.2%.

Impact on the stock market

The RBI’s monetary policy updates are one of the widely expected lines, so they did not negatively impact the stock markets. The market reacted positively to the announcements, with both the BSE Sensex and the NSE Nifty rising by 300 and 100 points during market hours on 7 October 2023.

After the rally, the Nifty 50 closed at 19,653.50, with a rise of 0.55% from the previous day’s level. Similarly, Sensex closed at 65,995.63 points, with a rise of 0.55% from the previous day’s level. Bank Nifty, FINNIFTY, and MIDCPNIFTY also rose by 0.33%, 0.71%, and 0.99%, respectively.

The top gainers for the day include Tata Consumer, Bajaj Finserv, ITC, Titan, and HDFC Life. The top losers include Hindustan Unilever, ONGC, Power Grid, Bharti Airtel, and Apollo Hospitals.

While the RBI’s policy updates have relieved investors, its hawkish stance may lead to some resurgence in the short-term market volatility. However, with companies due to announce their second-quarter earnings next week, this volatility could be short-lived.

To conclude

The RBI’s monetary policy updates, particularly changes in the repo rate, may impact the Indian stock markets substantially. While lower interest rates can stimulate stock market performance by making equities more attractive, it’s essential to consider other economic factors, global events, and company-specific fundamentals when making your investment decisions.

As an investor, you should closely monitor the RBI’s policy announcements and adapt your investment strategies accordingly. Additionally, it’s crucial to maintain a diversified portfolio with a mix of at least ten different stocks to manage risk effectively and capitalize on opportunities that arise in response to the RBI’s monetary policy updates.

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