How Repo Rate Changes Affect the Stock Market?

Did you see the oil prices during the Covid19 pandemic? Well, tons of them were unsold, and the prices dropped to as low as a dollar, and this happened all around the world. Don't you think one factor can affect another and the cycle just keeps going? That is exactly why you would have to be on the lookout for factors that surround the stock market, too - such as economic changes, depressions, food, and so much more. Since the stock market is a place where every industry and sector is present - it is quite a big deal to see changes because of other factors.

 

Here, we are going to be looking at the Repo rate and how it can directly affect the stock market.

 

What is the Meaning of Repo Rate?

Repo Rate is an acronym that stands for 'Repurchasing Option' Rate. The 'Repurchasing Agreement' is another name for it. In times of financial stress, people take out bank loans and pay interest on them. Similarly, commercial banks and financial organizations are experiencing a funding shortfall. They can also borrow money from the central bank of the country. Any country's central bank loans money to commercial banks at a fixed interest rate on the principal amount.

 

If a bank makes a loan against any type of security, the ROI is known as the repo rate. Commercial banks offer qualified securities to the RBI, such as treasury bills, gold, or bond papers. Banks can repurchase these securities from the RBI after repaying the loan. As a result - it is known as the 'Repurchasing Option.' If they accept a loan without pledging the securities, the interest rate is the bank rate.

 

So, before you start to invest in stocks, you need to know how the repo rate affects the stock market and its shares.

 

How is the Repo Rate Connected to the Stock Market?

The stock market and interest rates are inversely related. Each time the central bank raises the repo rate - the stock market reacts immediately.

 

This means that a rise in the repo rate causes corporations to cut back on expansion investment, resulting in a drop in growth and an impact on earnings and future cash flows, culminating in a drop in stock values.

 

If several corporations follow suit, the market will inevitably fall.

 

In a nutshell, an increase in interest rates means more savings and less capital flowing into the economy, resulting in a stock market fall.

 

Furthermore, the impact of a decrease in the repo rate does not have the same influence on all industries. Capital-intensive industries, such as capital goods and infrastructure, are especially exposed to these shifts due to large capital or debt on these organizations' accounts. At the same time, equities in industries such as information technology (IT) and fast-moving consumer goods (FMCG) tend to be less affected.

 

Other Surrounding Factors that Affect the Stock Market

 

a) The Budget

A budget is an event in which the Ministry of Finance examines in depth the country's finances. The Finance Minister presents the budget to the entire country on behalf of the ministry. Major policy pronouncements and economic reforms are made during the budget, which has an impact on numerous industries across the markets. Therefore the budget plays a key role in the economy.

 

b) The Purchasing Managers Index

The Purchasing Managers' Index (PMI) is an economic indicator that attempts to represent business activity in the industrial and service sectors of the economy. This is a survey-based indicator in which respondents - typically buying managers - describe how their business perception has changed over the past month. The service and industrial industries are polled separately. The survey results are compiled into a single index. The survey often covers new orders, output, company expectations, and employment.

 

The PMI normally fluctuates around 50. A number above 50 suggests economic expansion, whereas a reading below 50 indicates economic recession. A reading of 50 implies that the economy has not changed.

 

c) Index of Industrial Production

Index of Industrial Production is a short-term gauge of the progress of the country's industrial sector. The Ministry of Statistics and Programme Implementation releases the data (together with inflation data) once a month (MOSPI). The IIP, as the name implies, measures the output of the Indian industrial sectors while maintaining a constant reference point.

 

India currently uses the 2004-05 reference point. The base year is another name for the reference point.

 

Approximately 15 different industries provide production statistics to the ministry, which compiles the information and publishes it as an index number. If the IIP rises, it signals a thriving industrial environment (as production rises) and hence a favorable indicator for the economy and markets. A falling IIP suggests a slowing production environment, which is a bad indicator for the economy and markets.

 

d) Inflation

Inflation is a prolonged increase in the general rates and prices of goods and services. Inflation reduces the purchasing power of money. If the price of one kilogram of onion increases from Rs.15 to Rs.20, the increase is attributed to inflation. Inflation is unavoidable, but a high inflation rate is undesirable because it can lead to economic uncertainty. Inflationary pressures provide a negative signal to markets.

 

Both the government and the RBI are working to keep inflation under control. In most cases, inflation is assessed using an index. Rising inflation is indicated by an increase in the inflation index by a specific percentage point. Similarly, a declining index suggests that inflation is slowing.

 

These are just some other factors that you can keep an eye for before you can get going into the stock market investment journey. Once you know the right pain points, your journey in investing will be joyous as ever, with ever-blooming rewards.

 

Conclusion

It is quite hard to ever estimate what would happen in the stock market, but you can make sure you will be prepared for everything that takes place there. This article prepares you for one such that - make use of the points mentioned above.

 

 Disclaimer : The above is a sponsored article and the views expressed are those of the sponsor/author and do not represent the stand and views of The Tribune editorial in any manner.