What is RBI Monetary Policy and How does this impact individual Stock Price and Personal Expense :)

Monetary Policy is generally declared by RBI and related to interest rate … I hope you all have heard this quite a often in news channels and from the speech of Rajan …. By the way what is this ? CPI,CRR,Repo,Rate cut …. OMG!!!! These are not easy and hence market is not my cup of tea J

But in fact these are very simple at least common man understanding point of view … At least we can get an idea how this will impact our monthly family budget and stock market …..

So without wasting time let me start one by one......

Repo Rate:

When banks want to borrow money from RBI , the rate at which RBI lends money to banks is called Repo Rate.

Ex: If Repo rate is high then the then cost of borrowing is high .Then what will happen? Banks will lend money to us in a higher interest rate .Hence house loan , educational loan and other loans will be costlier for us .. Isn’t it !If banks will get loan from RBi at 8% interest rate , then they will give us loan more than that rate , it may be 9,10,11 or 12 though there are some rules but definitely not below 8%.

That’s why Bankers, Market do not want RBI to increase repo rate … Got it J

Reverse Repo Rate :

It is just opposite of repo rate. In this case banks lend money to RBI .In this case banks are happy to give loan to RBI instead of big corporate because the chance of getting default is NIL J

But here also there is a twist. Suppose if Reverse Repo rate is high and banks lend money to RBI heavily , and they don’t lend to corporate and hence liquidity in the system tightens .Consumption dampens if it continue for a long time .Hence high Revese Repo rate is also not good for economy isn’t it !

CRR (Cash Reserve Ratio):

Every bank is mandatorily required to maintain funds with RBI. The amount that they maintain is dependent on the CRR. If CRR increases then more money is removed from the system, which is again not good for the economy.

The RBI meets every quarter to review the rates. This is a key event that the market watches out for. The first to react to rate decisions would be interest rate sensitive stocks across various sectors such as – banks, automobile, housing finance, real estate, metals etc.

Statutory Liquidity Ratio (SLR):

Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR).  RBI is empowered to increase this ratio up to 40%.  An increase in SLR also restricts the bank’s leverage position to pump more money into the economy.

Now the Big Monster is Inflation .What is inflation?

All things being equal, if the cost of 1 KG of onion has increased from Rs.15 to Rs.20 then this price increase is attributed to inflation. Got it !

Inflation is inevitable but a high inflation is not desirable and creates uneasiness for economy because consumption dampens and saving reduces and hence domestic investment from retail people too . Nobody will tell you domestic retail part but I will as I know the power of common Indian.

There are 2 types of inflation

1. WPI (Wholesale Price Index)
2. CPI (Consumer Price Index )

WPI	CPI
The WPI indicates the movement in prices at the wholesale level. It captures the price increase or decrease when they are sold between organizations as opposed to actual consumers.	The CPI on the other hand captures the effect of the change in prices at a retail level. As a consumer, CPI inflation is what really matters. The calculation of CPI is quite detailed as it involves classifying consumption into various categories and sub categories across urban and rural regions. Each of these categories is made into an index. This means the final CPI index is a composition of several internal indices.
WPI is an easy and convenient method to calculate inflation. However the inflation measured here is at an institutional level and does not necessarily capture the inflation experienced by the consumer.	The computation of CPI is quite rigorous and detailed. It is one of the most critical metrics for studying the economy.  A national statistical agency called the Ministry of Statistics and Programme implementation (MOSPI) publishes the CPI numbers around the 2nd week of every month.

The RBI’s challenge is to strike a balance between inflation and interest rates. Usually a low interest rate tends to increase the inflation and a high interest rate tends to arrest the inflation.

Index of Industrial Production (IIP):

The Index of Industrial Production (IIP)  is a short term indicator of how the industrial sector in the country is progressing. The data is released every month (along with inflation data) by Ministry of Statistics and Programme implementation (MOSPI). As the name suggests, the IIP measures the production in the Indian industrial sectors keeping a fixed reference point. As of today, India uses the reference point of 2004-05. The reference point is also called the base year.

Roughly about 15 different industries submit their production data to the ministry, which collates the data and releases it as an index number. If the IIP is increasing it indicates a vibrant industrial environment (as the production is going up) and hence a positive sign for the economy and markets. A decreasing IIP indicates a sluggish production environment, hence a negative sign for the economy and markets.

To sum up, an upswing in the industrial production is good for the economy and a downswing rings an alarm. As India is getting more industrialized, the relative importance of the Index of Industrial Production is increasing.

A lower IIP number puts pressure on the RBI to lower the interest rates.

Purchasing Manager Index (PMI):

The Purchasing managers index (PMI) is an economic indicator which tries to capture the business activity across the manufacturing and service sectors in the country. This is a survey based indicator where the respondents – usually the purchasing managers indicate their change in business perception with respect to the previous month. A separate survey is conducted for the service and the manufacturing sectors. The data from the survey is consolidated on to a single index. Typical areas covered in the survey include factors such as new orders, output, business expectations and employment amongst others.

The PMI number usually oscillates around 50. A reading above 50 indicates expansion and below 50 indicates a contraction in the economy. And a reading at 50 indicates no change in the economy.

Apart from this Budget and Corporate earnings are 2 different factors influencing country’s economy.

So are you ready for next monetary policy to hear from RBI Governor and make your own predictions J ……..