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RBI’s MPC: What is it doing  periodically? How  and why it impacts Share  markets?

The Reserve bank of India, the central bank of the country, has numerous tasks cut out in its role functions. RBI has been vested with powers to control the Commercial banks, including licensing them and supervising them. RBI serves as an Accountant of Govt. of India. It serves as the Bankers’ Bank- the lender of last resort. It is also voted with the powers of monitoring the flow of  money from India to other countries and vice-versa as Foreign Exchange management  is one of the core functions of RBI. This apart RBI has one another important task to monitor and tame inflation.  In order to rein in the  inflationary  trends in the economy, the RBI is empowered to arrest or release the funds flow into the economy essentially through banks which is the major  reservoir of lend able resources.

In the process RBI from time to time reviews the status of the economy from various angles like commodities production, supplies, demand  and the pricing of all these. Based on that to contain inflation and keep it under a reasonable level, the reserve ratios help RBI to release or suck funds from the economy. Government being the whole owner of RBI has constituted a committee of economists and experts  called  Monetary Policy Committee (MPC) and its members scan the economic eco system and suggest ways and means to keep the flow of money into the market under check and control.  Recently last week the committee unanimously concluded that the inflation is under control and liquidity is a major problem for the Industries and others , there is a need to  reduce the REPO rate- the rate at which RBI lends money to the Bankers. Thus reduced 25 bps for the third time to 5.75 %. This move eventually releases  a lot of funds into the market at a cheaper rate of interest and banks can borrow at a lower rate than ever and lend to potential borrowers at a cheaper rate. Housing loans, Car loans,  agri. Loans, export loans  and all will get the benefit if the banks prefer to pass on the rate reduction to ultimate borrowers. This would in turn push growth in demand and private investment leading  to a push in GDP.

But when the rate change was announced, the markets were highly turbulent and were going up and down. While the reduction is a welcome measure, market tumbled down on that day lastly as the news was as per expectation and hence  discounted by the market. In fact the market was down as the expectation of the reduction of Repo was to the extent of 50 bps as  against 25 bps announced by RBI. This is also considered as one reason for beating the market. It is advisable to desist from trading on such dates and if at all, ‘stop-loss’ tool to be strictly applied. Similarly when the results of companies are expected the turbulence will be more like this. Also on  Budget announcement days. Let us be careful and  do trading or investment with awareness of the tides  in the markets.

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