India formulates many policies that include monetary and fiscal policy. Monetary policy is issued by RBI depending upon various factors. On 05th Feb 2021, RBI issued its monetary policy in Mumbai which was bi-monthly. The policy document stressed the need for bringing more growth back into the track. Last year, growth prospects were not bright.
High capital and human resource industrial as real estate, transport, retail, and others were, struggling to maintain their business growth. Firstly the fear of covid- 19 infections, and secondly, the action was, taken by the government impacted the whole economy. GST collection of government was low, and our financial institutions were struggling to tackle the double whammy of low growth and high NPAs.
In that background, RBI issued its policy on 05th Feb 2021. The development of vaccination, coupled with positive policy outcomes brings happiness into the capital market. Two indicators of the capital market:- BOMBAY stock exchange (BSE) and the National Stock Exchange (NSE), both rallied and crossed the all-time high record. Here we will discuss all the points about the policy and how it impacted the share market.
Salient details of policy outcome
1. No interest rate change
RBI control the money circulation through Repo rate, Reverse repo rate, cash reserve ratio, statutory liquidity ratio, etc., No change in any interest rate had an extensive implication on the economy in general and the share market in particular. Growth and inflation very much depend on the availability of cash into the hand of people and banking institutions.
Take an example of a repo rate. This rate defines the interest charged by RBI to other banks when they lend from RBI. Here no change in Repo rate by RBI shows that the regulator does not want to control or decontrol the money circulation. The increase in repo rate indicates that the regulator is worried about inflation, and, that is why it has decided to raise the interest.
When the interest rate is, lifted banks take less lending from RBI because they have to pay more. So less cash in banks and that ultimately goes into the supply chain. Banks with lesser money, do not lend much to the public. No policy rate change boosted the confidence of the share market. Different, sectors like Banking, Pharma, FMCG gained well on the market.
2. GDP growth projection
It indicates the economic growth of the country. For the last two decades, India has maintained consistency in growing except for some years. India is a fast-moving and growing economy after China. But last year, the whole world was under the grip of COVID -19. RBI stressed the positive trends in the GDP projection. It is, projected that GDP, will grow at 10.5 % in the fiscal year 2022. It is such a brilliant projection by RBI, and it shows that India is a resilient country. Despite struggling with various issues, we tackled the coronavirus very well.
Good growth projection sends positive signals to all the investors. They picked up this section and put more money into the market. The BSE Sensex- 30 crossed 51000 marks, and NSE nifty- 50 crossed 15000 simultaneously. People invested heavily in SBI, Kotak Mahindra Bank, ITC, HDFC, Ultratech cement. SBI gained over 10 percent on Sensex. State bank of India (SBI) is the leading bank that supports various initiatives of the government. High growth projection leads to speculation of more capital infusion by the government into banks. Banks share reached a great height.
3. Rural India resilience
RBI put its full faith in rural India. It stressed the need to focus on rural areas for growth. Cities are more affected by the coronavirus, and the consumption capacity of urban people is reaching a saturation point. It means that urban houses already consume a large variety of consumables and non-consumables products.
For example, an Air conditioner is very common in the civic area, but rural India very much unaffected by this product. The market regulator indicated rural lead growth. Investors picked up this section and invested in FMCG and other sectors. A leading company of FMCG, ITC gained over 5 percent on a single day. Aditya Birla’s lead group, Ultratech cement also gained good.
4. Priority sector inclusions of NBFCs
Non-banking financial companies do the extra mile works of financial inclusion and credit growth. The role is, recognized by RBI in its policy review. The regulator included NBFC under long-term operations. It gave them an option to take high volume lending from banks for the long term and, at the floating rate of interest. Also, The cost is connected, to the repurchase rate. That gave sentiment that in the next fiscal year, NBFcs will have more funding. More funding is an indicator of more lending into the market.
5. International connection
Our share market is affected by all the happening in and around the globe. Corona vaccination has already sent a positive vibe into the market. European countries share market FTSE 100, CAC 40, DAX, Euronext 100, and all others are trending in good height. Europe was, badly affected by Covid 19, and countries like Spain, Italy, Great Britain suffered heavily. Additionally, government change in the USA is also a piece of positive news for the market.
Earlier government lead of Donald Trump was always a media element for various reasons. Which, created a tense situation with other Asian countries. Investors were skeptical about investment as they fear that war may break out between the USA and China. Share markets around, the globe are already in a positive trend, and at that time, RBI shows opportunity for investors. People tapped these opportunities, and the share market reaches its all-time high.
Overall, the policy review was on the positive line. More good effects will come up in the coming days.
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