Reserve Bank of India is a regulating authority of banking sector in our country. RBI is also responsible to control the inflation and money supply in the country.

RBI handle all the above issue by creating Monetary policy and review it after every 3 month periodically time to time. RBI always check the current market scenario and take decision accordingly to increase or decrease the interest rate.

Before understanding the we need to know that banking and financial services industry is having major contribution in major stock market index Nifty which can see by below charts :

So if RBI control the interest rate (up or down) during monetary policy review then these companies is going to be effective most and NIFTY / SENSEX that day. If you have idea what RBI is going to do with interest rate then you can earn a lot from the swing of the market.

What is Monetary Policy?

Component of the monetary policy:

1. CRR: – CRR means Cash Reserve Ratio, a bank need to maintain this ratio with RBI every time proportion of deposits in the form of cash.
2. SLR: SLR means Statutory Liquidity Ratio, a bank need to maintain with RBI in form of the cash, Gold or other securities approved by the RBI.
3. Repo Rate: Repo rate is a rate by which RBI give money to the bank for loan purpose or advance.
4. Reverse Repo Rate: Reverse repo rate is the rate in which RBI can get money from the bank for credit purpose.

What is current rate of monetary policy as on 29^th June 2018?

CRR        : 4%

SLR         : 19.5%

Repo Rate             : 6.25%

Reverse Repo Rate  : 6.00%

Who is responsible to change the rate of the monetary policy?

What is  MPC – Monetary Policy Committee?

RBI Governor was responsible to change the rate of the monetary policy till the honorable Governor of Mr. RaguramRajan but after his term a new committee has been formulated by Govt. of India name MPC, Monetary Policy Committee which is headed by Governor of the RBI and having which 6 member 3 from RBI and 3 from Center Govt. It depend on voting of the member weather rate  would be change or not. 

Why NIFTY / SENSEX   gain if the interest rate cut by RBI?

Because if the loan is cheaper then there be growth in the market taking the loan by entrepreneur people and they will produce more products / services. More people will get the employment and economy will grow on a fast track.

But inflation might be increase  because of the surplus cash in the market and currency can get cheaper.

Why NIFTY / SENSEX go down if the interest rate increase by RBI?

Vice versa if the loan is getting costlier the people are avoiding to take the loan and upcoming project might be delay and ongoing project also can face shortage of the fund due to lack of liquidity in the market. So only a few people will get the employment in the market and production would be at low level. The economy will increase at a low point.