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RBI today reduced the repo rate by 0.25 percent. The effect of this cut was also visible on the market. As expected, the market went up. But why does the market get affected by the decrease in repo rate? Is there any direct connection with this? We will answer these questions in this article.
New Delhi. The Monetary Policy Committee of RBI has announced the results of its 3-day meeting on 5 December. MPC reduced the repo rate i.e. policy rates by 0.25 percent from 5.50 percent to 5.25 percent. RBI has reduced the repo rate 4 times in the last 5 meetings. This not only affects loan interest rates and FD returns, but its impact is also visible on the market. Today’s question is what difference does the fall in repo rate make to the market? The answer to which you will get further.
Changes in policy rates by RBI have a direct impact on the sales of companies. This rate actually increases or decreases to encourage or discourage people from buying. In this way the cash flow in the market is controlled. Let us understand what effect this has on the shares.
repo rate increased
Suppose RBI increased the repo rate by 0.25 percent. Due to this, people’s EMI will increase. Buying anything on loan will become costlier than before. For example, the property loan which was 8 percent will increase to 8.25 percent. So people will shy away from spending money. Because if the EMI increases on purchasing something, the return on deposit will also increase. People prefer to deposit money in banks or fixed deposits. There will be restrictions on shopping. Due to this the sales of companies will come down. Down sales means that earnings and profits will go down. This opportunity proves to be useful for intra-day traders. They start selling shares. In such a situation, short sellers benefit a lot. Who earn from recession in the market.
repo rate reduced
Now suppose that RBI reduced the repo rate by 0.25 percent. As it happened today. In such a situation, the exact opposite of the situation mentioned above will happen. That means EMI will reduce. It will be easy for people to buy cars and houses. When the returns on deposits are low, people will try to withdraw money from there and invest it in the market. Because in such a situation the market going up is almost certain. Like what happened today. Today Sensex rose by 0.52 percent and closed at the level of 85712. At the same time, Nifty closed at the level of 26186 with a rise of 0.59 percent.
Which stocks are most affected?
In both the situations, the stocks which are most affected are banks, auto, real estate and FMCG. Its impact is not visible that much on tech stocks. If the rates increase then the expectation of increase in deposits in banks also increases and the shares go up. But real estate becomes a disaster. At the same time, there is a very sharp decline in auto shares. FMCG shares also come down. But if the repo rate decreases then the exact opposite happens. That means the bank’s shares fall. Real estate and auto become rockets. Good growth is seen in FMCG. If we understand this in one line-
RBI reduced rates → Loans became cheaper → People spent more → Company profit → Shares up
RBI increases rates → Loans become expensive → People spend less → Company profit less → Shares down
But it is not that all this effect can be seen on the same day. Many times the effect is visible in the coming days. Therefore, it is okay to invest money without thinking just by looking at the change in policy rates. Especially retail investors get trapped in such situations when big investors make money by trapping small investors. Therefore, regardless of the MPC results, it is mandatory to do thorough research about any company before investing money.
