reserve Bank of India hikes interest rates after two years | Impact of RBI rates hike on Stock market

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Reserve Bank of India (RBI) hikes Interest rates after two years. It has increased increased it’s Cash reserve Ratio (CRR) by 0.5% to 4.5% and Repo rates by 0.4% to 4.4%. Here you will see why it was necessary and how it will affect Indian Stock Market.

What is Cash Reserve Ratio (CRR)?

Cash Reserve Ratio popularly known as CRR is the ratio of Net Demand and time liability (NDTL) that must be kept with RBI. (India’s Central Bank), in the form of liquid cash. the objective of this is to regulate money supply in the Economy. This also helps the Central Bank to keep Inflation in control and also help the Banks in difficult time. Recently RBI

What is Repo Rate (Repo) ?

This is a rate at which central bank lends money to the commercial banks for short term.

Recently the meeting of monetary Policy Committee was held on 04.05.2022. The committee decided to hike CRR by 0.5% to 4.5% and Repo rate by 0.4% to 4.4%.

Impact of hike in crr and repo rate on indian stock market

Hikes in repo rates will increase the cost of funds for commercial banks and ultimately will cost more to the public to borrow. This will demotivate demand hence inflation will be decreasing. Lesser demand with and lower inflation both will demotivate the investors to invest. Thus stock market will also face negative force.

By increasing CRR and Repo rate RBI has tried to control the inflation that is recorded as higher as 6.95% in the march 2022.. Now the hike of CRR by 0.5% will bring change in the money supply down by Rs. 83000 crore. This will ultimately reduce the demand and will help to control the inflation in the economy

Similarly higher Repo rate will cost higher to borrow by commercial banks from the central bank and this will ultimately increase the interest rates and EMI for the general public. This will reduce the demand for the consumption purpose and for also the demand of money for the investment. 

As we have discussed, this decision of the RBI will reduce the demand in the economy. The demand for money for investment also for the consumption will reduce. This will have a negative impact for the investors and also for the industries. So it will be affecting the stock market negatively and that is why the Indian stock market fell on the day Nifty by 2.29% and Bank Nifty by 2.49% after the announcement of these decisions.

Conclusion

By the above discussions you can see that the market will be facing some negative force till it digests  this decision of Reserve Bank of India. 

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2 thoughts on “reserve Bank of India hikes interest rates after two years | Impact of RBI rates hike on Stock market”

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