Role of RBI

The RBI plays an important role in Indian economy. It tries to strike a balance between the twin objectives of controlling inflation and accelerating growth.  RBI has various monetary tools to control inflation, like repo rate, reverse repo rate, cash reserve ratio, statutory liquidity ratio and open market operations. The inflation as measured by whole sale price index (WPI) had remained above or around 10% mark in the year 2010 and 2011. To control this, RBI had gradually increased repo rate from 4.75% to 8.5% and reverse repo rate from 3.75% to 7.5% from the beginning of 2010 to the end of 2011. The consequence of this action resulted in taming of inflation but sacrificing growth. The year 2012 saw inflation coming down but still remaining above the 5% mark set by RBI as a comfortable figure. Hence in 2012 RBI followed a wait and watch policy and reduced repo rate by only 50 basis points from 8.5% to 8%. This was done because of pressure on the growth front. The cash reserve ratio was also reduced to 4.25% to infuse liquidity into the system and spur economic activity. The year 2013 started with a further reduction in repo rate and with headline inflation touching to a 40 month low of 5.96%, RBI in its latest monetary policy review on May 3, 2013 reduced the repo rate from 7.5% to 7.25%. So far RBI has done a commendable job of striking a fine balance between inflation and growth without succumbing to pressures from political and business class. The future liquidity position, which at present is slightly tight, will depend on the Government borrowing and spending and credit and deposit growth rate of banks. The head line inflation which is expected to come down will depend on the international commodity prices especially the crude oil which constitutes a major bulk of our imports. 

Stock Market in the coming months

As reported in the “The Economic Times”, dated April 30, 2013, the secondary market (stock market) in the next two-three months will remain range bound and lacklustre. This is due to a deluge of equity share issue from companies in which the minimum public share-holding is less than 25 percent as mandated by SEBI. The minimum share-holding has to be achieved by June 2013 and August 2013 by private sector and public sector companies respectively. This (SEBI mandate) will have implications for the secondary market as investor money could chase new shares, leaving very little for other stocks. With FII inflows dipping, thanks to political uncertainty casting a shadow on reform measures and current account deficit, such trades could leave the market bearish.

Hence stock market investors should take the above information into account before devising their trading strategies.