RBI Monetary Policy : Key Highlights

On 10th February, 2022, RBI announced its Monetary Policy for Bi-monthly outcome. The policy was a shock to the entire world due to 2 major announcements. The RBI Governor Satikanta Das, made some bold statements which showed the markets in upward direction. The major decisions were regarding the repo rates and cryptocurrency trading. The meeting was to be organised previously between 7th to 9th Feb. However due to the demise of Legend Lata Mangeshkar, the nation held a mourning day. Hence the meeting was postponed on 10th Feb, 2022.

The FM is also expected to talk with the monetary policy committee on 14th or 15th Feb, 2022. The monetary policy is normally given 4 times a year by the central bank. However under some scenarios the policy can also be updated more time than the number described.

The assumption before the Monetary policy was that the RBI will increase its repo-rates so that it can control the additional flow of liquidity in the economy. Alongside this the RBI was also expected to give some highlights about the Digital Rupee Cryptocurrency announcement made by FM in Budget 2022. Everyone put forth the assumption that the repo rates will not be in favour of the banking industry. It was led by the Fed announcements to cut down the rates in the central bank’s favour so that the liquidity can be controlled. However the announcements made shook the entire markets and specifically Bank Nifty.

RBI Announcements

Rates

The Major announcement from the RBI was its Repo rate disclosure. The RBI kept a status quo status and did not change the repo rates. This means that the banks can still lend out money at the rates given further and that makes it easy for the system to run in the smooth manner as before. Alongside this the RBI wants EMI’s to function in a similar manner. With such additional liquidity prints from the central bank, the rate of inflation is going up. Usually in such situations the central bank stops its money outflow or puts an indirect hold on the same by changing the repo rates.

For better understanding Repo rate is the rate at which banks borrow money from RBI and Reverse Repo rate is the rate on which RBI gives interest to banks for keeping their short term funds. These rates are 4% for repo rate and 3.35% for reverse repo rates.

Hence the unchanged rates signal a stable economic growth expected from the RBI. However, enlightening the liquidity problem, Shaktikanta Das signalled that there would be multiple rate changes in the next financial year but the time frame is not yet fixed from the RBI. The bank wants to overlook the economic conditions and take the decision in the further course of time.

Cryptocurrency

Shaktikanta Das addressed the nation for discussion of the economic outfront for the current scenario. In the entire list of disclosures he even mentioned that cryptocurrency is a threat to the Indian economy. It has the strength to derail the entire system with its robust changes and unorganised manner of working. Hence the cryptocurrency is getting multiple red flags from the Governor of India and the Finance Minister of India. He even warned Indian Cryptocurrency companies in an indirect manner.

Market Effects

The Indian markets were trailing from early losses in the opening time. The Sensex which opened 400 pints up in 9th Feb, 2022’s session, was looking very weak. Before the RBI announcement large amounts of orders were getting accumulated on the put option. The simple reason is if the rates are changed and the business of banks is affected the direct effect is to be noticed on Bank Nifty. This in turn would affect the financial sector of Indian markets. With a major stake in Nifty50 for the financial segment, one can easily expect a downfall with rate changes which were not in favour of Banks.

However when the RBI took no action on rate changes the markets rebounded in a very uneasy manner. The losses were written off with a ramping 200 point gains on the Nifty50 outfront. This was led by Oil stocks and Banking stocks. However the Major movement was due to the Bank Nifty index. The markets were trading flat before the announcements made by Shaktikanta Das. Post the announcement BankNifty broke its 38900 Levels and even touched 39300 Levels In future prices. The Nifty50 touched 17650 levels and rebounded from there. However at the end of the day’s session the markets saw major correction within 5 minutes. The Nifty50 went down by 50 points.

Bank Nifty

The reaction of rates unchanged was immediately noticed in the Bank Nifty levels. There was a large amount of put calls which vanished with Banknifty making a high 39300 Levels. This was due to the unaffected business of the banking industry in current times. It was also clear that the government is showing support to the financial segment in such a time of inflation.