Monetary Policy - Back to Basics
Entire media is reviewing the Monetary Policy and so are many others out there.
What are the aspects involved in Monetary Policy?
Let's learn about it
Read and find out in today’s Smart Mornings
Since the media is buzzing with monetary policy review, we just thought of giving you a basic understanding of the aspects involved in our own way. Almost everyone is repenting the RBI’s decision to hold the rate cut and we’re pretty sure that most of them do not even know about the impact of rate cut. So, reading this newsletter will give you an edge over them.
Before delving into information and concepts, here’s an example to express our judgementalism for those ‘self-proclaimed economists’ out there. These people resemble to the folks who thoroughly enjoy English songs without understanding a word of it (but pretending as if they understood every bit of it).
Repo Rate
Let’s start with the all-time favorite ‘Repo Rate’. There’s a popular dialogue from a Bollywood movie which goes “Teen Guna Lagaan Dena Hoga”. That ‘lagaan’ in this case is the repo rate, which is charged by the Reserve Bank of India (RBI) to commercial banks for lending money.
Actually, RBI lends money to commercial banks in case they face a shortfall or any deficiency of funds. But, it does not give them the money for free. It charges an interest rate which is called the repo rate.
What if Rate was Cut?
We’re not going to bore you by giving you a numerical analysis of a hypothetical situation where the rate was cut by some basis points. We’ll give you an easily understandable explanation of the effects of a rate cut.
So, if RBI would have decided to cut the repo rate, it would have reduced the ‘cost of borrowing’ for banks. The banks in turn would have passed the benefit to their customers by reducing the interest rates that they charge. This would have made people to save less and spend more since saving would not be that attractive. In that case, people would have preferred equity investment over keeping their money in their savings account. This would have enhanced investment in the market.
Ok, that was too much of ‘would have’. So, now let’s just discuss what ‘will’ actually happen. By the way, the economy takes time to adjust so that ‘would have’ happened, would have actually taken time. On the contrary, market reflects almost immediately through volatile pricing.
Think as an Investor
An investor invests in company(s) of his choice. Now, whether rate is cut or increased, if the company is well managed and strong enough to sustain such changes, it doesn’t really matter for the investor. Hence, a long-term investor will not worry for these short term changes. Also, an investor would not think about the rate cut directly but, would analyze its impact on companies’ performance in which he/she has invested.
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