Recently RBI hiked repo rate and reverse repo rate from 5.5% to 5.75% (‘25 basis points’ is another way of saying ‘0.25%’) and the reverse repo rate from 4 to 4.5% and investors are thinking should they buy, sell or hold stocks. First of all let us understand why did RBI hiked repo and reverse repo rate and the obvious answer is to keep the inflation under control. As we all know that access of liquidity in the financial system causes inflation but the main reasons this time were:
1. Reduction in the repo and reverse repo rates by the RBI during the downturn in 2008 and 2009
2. Continuous inflow of large sums of FII money into the Indian stock markets
3. Larger inflow of remittances from NRIs into India (due to the economic downturn in Europe and USA)
A crash in stock market is unlikely. The hike in the repo and reverse repo rates were already ‘discounted’ – which means that it was within expected limits.
1. Reduction in the repo and reverse repo rates by the RBI during the downturn in 2008 and 2009
2. Continuous inflow of large sums of FII money into the Indian stock markets
3. Larger inflow of remittances from NRIs into India (due to the economic downturn in Europe and USA)
A crash in stock market is unlikely. The hike in the repo and reverse repo rates were already ‘discounted’ – which means that it was within expected limits.
Should investors buy, sell or hold
Answer to this question depends on individual invesotrs and traders. Here, I would like to say that it is not favourable for bull market, as it raises the cost of doing business and affects profitability.
My recommendation here for traders who want to buy is to select only fundamentally strong stocks with a track record of flourishing through several bull and bear phases. If you already have such stocks in your portfolio, hold with trailing stop-losses and ride the bull. Book profits in any second or third rung stocks that you may own.
There is no reason to sell in a panic as long as the Sensex trades above a rising 200 day EMA, we are in a bull market. Setting stop-losses will save portfolios from getting destroyed.
1 comments:
As RBI has increased the repo rate and reverse repo rate that clearly indicates that now banks have to pay more interest on the money that they have borrowed from the centeral bank as far as repo rate is concerned,which in context they will be decreasing the rate of interest they are paying to the depositors.
In the same way as the reverse repo rate has been increased commercial bank can earn more interest on the money that they have deposited with the centeral bank(RBI) thus in context they can provide more interest to their depositors.
Repo rate is generally incresed to control INFLATION by pulling out the surplus money that is flowing out in the Market.
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