RBI may cut rates on 07-12-2016 Wednesday (tomorrow), by 25 Basis Point (BPS). This could be one reason stock markets in India, Nifty and BSE are going up.
One basis point is equal to 0.01%. So 25 basis points is 0.25% reduction in interest rate.
Definition of BPS from Investopedia:
Basis point (BPS) refer to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001), and is used to denote the percentage change in a financial instrument.
What does this mean?
This means the repo rate that RBI pays to banks to keep money with it will get reduced by 0.25%.
So What This Has To Do With Stock Markets?
When Repo Rates are reduced banks make less money with the parked money with RBI.
When banks make less money it is obvious that they cannot give more money to people who keep money with them, so it is likely that the Fixed Deposit rates may get reduced.
It is to be seen that home loans and personal loan rates get reduced or not.
Please note that to reduce the FD rates depends on the management of the bank so the Fixed Deposit rates differs from one bank to another.
It should also be noted that CRR limit is likely to be maintained at the 4 percent level. Which means banks will still keep 4% of the money they receive from deposits.
Update on 07-12-2016, 11.20 am:
Today is the RBI Policy on rate day and as written yesterday we may see a 25 BPS cut in Repo rate. In fact all 6 members of the MPC voted in favor of a rate cut, so 25 basis points rate cut is almost sure.
In fact many banks have begun to reduce interest rates ahead of Reserve Bank of India’s monetary policy announcement as cost of funds continues to decline. Bank of Baroda in the first bank to do so. Yesterday it reduced its one-year benchmark lending rate by 20 basis points or 0.20%.
Due to this expectation Nifty is trying to go up. If it happens Nifty may be up by a few percentage in days to come else we may see levels of 8000 again. But there is a big chance of rate cut, so positive news for Investors which means Nifty will go up.
All over the world the stock markets are going up. In fact Dow Jones one of the main stock market Index of USA has hit a record high yesterday.
This is good news for Indian markets. Why? Because most of the times Indian traders copy the movement of the US markets. If RBI does cut repo rate by 25 basis points we will see Nifty moving up swiftly.
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