Why the RBI action on Dec 18 is important for stock markets?

Invariably, anchors at business channels, will always have one question to ask investment analysts and brokers: "Do you think the RBI will cut rates going into its policy meeting of ...?

How does RBI action affect stock markets?

If the RBI cuts interest rates going forward, it brings down the borrowing rates for corporates and thus spurs growth. Also, a lower interest rate regime means a direct impact on bottomlines for companies, as interest costs on debt gets reduced. This allows the stock markets to trend higher.

RBI has to wait for inflation

Everybody, including the RBI, I am sure wants lower interest rates. However, India's central bank is often bogged down by high inflation rates in the economy. If it cuts rates, it could spur growth, but, also push inflation higher.

In India the WPI inflation for November came in at a staggering 7.45%. This is certainly high and not in the comfort zone of the RBI. In fact, India's central bank governor, D Subbarao has made it abundantly clear that he wishes to tame inflation, while growth would remain secondary. If one goes by the consumer price index, it is at 9.9% for November, which is almost into double digits.

The RBI will meet on December 18 to decide on policy action. Most of the economists and analysts believe that the RBI will hold rates, until January at least. Some believe that the Reserve Bank will cut the cash reserve ratio (CRR) for banks. CRR is the proportion of deposits that Banks have to keep with the RBI.

It would be interesting to see what the RBI does on December 18. In all probability it is likely to maintain a status quo on rates, while cutting the CRR.

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