RBI just raised the repo rate 😱 and the stock markets fell by 2.5%
What does this mean and how can it affect your portfolio?
Relax bois and girls, we’ve simplified it for you in a thread🧵
What does this mean and how can it affect your portfolio?
Relax bois and girls, we’ve simplified it for you in a thread🧵
Let’s first understand what Repo Rate is:
Repo rate is a the fancy term for interest rate at which the RBI lends money to commercial banks.
You want to take a loan? You go to a bank and pay an interest on it
When banks borrow money from RBI, they also have to pay interest.
Repo rate is a the fancy term for interest rate at which the RBI lends money to commercial banks.
You want to take a loan? You go to a bank and pay an interest on it
When banks borrow money from RBI, they also have to pay interest.
That interest is called Repo rate.
In banking terms it's also called as Repurchase agreement.
But now the question is why this is so important that it becomes national news?
In banking terms it's also called as Repurchase agreement.
But now the question is why this is so important that it becomes national news?
See because repo rate is used to control the flow of money in our economy.
This rate decides if we are in the period of inflation or deflation.
This rate decides if we are in the period of inflation or deflation.
The RBI finally wants to control inflation and that is why they’ve increased the repo rate.
Now banks will have to pay more interest on the money they are borrowing from RBI.
Now banks will have to pay more interest on the money they are borrowing from RBI.
Because banks will have to pay more, they will also raise their interest prices for common people & businesses.
It will restrict borrowing and less money will be available in the market and that's one way they’ll curb inflation.
It will restrict borrowing and less money will be available in the market and that's one way they’ll curb inflation.
What will this do to companies (and basically your portfolio)?
As the repo rate increases, the cost of borrowing increases. This makes businesses spend less on growth and expansion.
As the repo rate increases, the cost of borrowing increases. This makes businesses spend less on growth and expansion.
And you know if the company isn’t growing in profit and cash flow, it’s stock won’t be able to generate good returns (usually).
So, during this period you can expect a subdued growth in your portfolio.
So, during this period you can expect a subdued growth in your portfolio.
RBI has also increased the CRR.
This is the Cash Reserve Ratio.
This is that part of a bank’s total deposits which it maintains as cash.
The banks have to strictly maintain it.
This is the Cash Reserve Ratio.
This is that part of a bank’s total deposits which it maintains as cash.
The banks have to strictly maintain it.
Increasing the CRR means that the banks would be able to lend less, which would reduce the money available in the economy and that curbs inflation.
What do you think about this move by RBI? Is it coming at the right time? Let’s have a chat in the comments...
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