Impact of monetary policy on stock market in India

Impact of monetary policy on the stock market in India

The economy of a country is a very complex subject. We saw that RBI cut 0.25 interest rate from the last 9 month. There are few peoples they support RBI decision and others don't support the decision. But before any conclusion, we need to understand a few terms and the reasons behind the RBI decision.

What is the hawkish stance by RBI?

RBI takes a hawkish stance when RBI needs to control the inflation rate in the country. Hawkish stance indicates the increase in interest rates to control the demand. If demand is low country growth gets slow. As we can saw the past in 2012  the inflation is very high and the GDP of India is growing at the rate of 8 - 9 % and it is fastest among the emerging countries. Therefore RBI starts to increase the interest rates after 2014 to control inflation and now inflation is very low therefore there is a slowdown in the economy.

What is the dovish stance by RBI?

RBI takes a dovish stance when RBI needs to increase the inflation rate in the country. Dovish stance indicates the decrease in interest rates to increase the demand. If demand is high country growth increases. As we can saw the past in 2019  the inflation is very low and the GDP of India is growing at a rate of 6 %. Therefore RBI starts to decrease the interest rates after 2019 to increase inflation.

The disadvantage of a rate cut by RBI

• It is bad news for fixed depositor
• Bank reduce the FD rates and saving account interest rates.

The advantage of a rate cut by RBI

• It is good news for loan borrowers.
• Bank reduce the interest rates and it reduces the monthly EMI

When RBI reduces interest rates

• When there is low inflation in the country
• When there is a slowdown in the economy
• When there is a slowdown in real state 
• When capacity utilization of companies is low
• To increase the liquidity in the system

When RBI increase interest rates

• When there is high inflation in the country
• When NPA of banks increases
• To decrease the demand
• To increase the strength of the currency