What is Monetary Policy? | How its Related to Indian Stock Market | Tamil | SJ Informative

WHAT IS MONETARY POLICY
Monetary Policy is the policy which is designed for the regulate the money supply to achieve macroeconomic goals like Inflation. This policy is designed by Central Bank in India which RBI, Reserve Bank of India.

By adjusting the interest rates, RBI regulate the money supply to maintain the Inflation. There certain types of monetary policies and have some important tools, which is discussed in this blog.
TYPES OF MONETARY POLICY
Expansionary Monetary Policy
It is one of the types of monetary policy which is used for increase the money supply in India. RBI use this policy by reducing the interest rates, there by increase the money supply in India.
Contractionary Monetary Policy
It is another type of monetary policy which is used for decrease the money supply in India. RBI use this policy by increasing the interest rates, there by decrease the money supply in India.
TOOLS OF MONETARY POLICY
Bank Rate
It is one of the important tool for RBI to regulate the money supply. It is the rate at which commercial banks in India lending RBI for long term loan, interests are paid based on this rate. If RBI increase the bank rate, borrowing money by Commercial banks from RBI will be decrease. If RBI decrease the bank rate, it will happen vice versa.
Cash Reserve Ratio - CRR
It is the ratio in which the commercial banks need to maintain certain amount in RBI account, if not penalties need to pay by commercial banks to RBI. If RBI increase the CRR, commercial banks need to keep more amount in RBI. If CRR decrease, commercial banks can deposit less amount in RBI account, by doing this, RBI regulate the money supply.
Statutory Liquidity Ratio - SLR
It is the ratio, in which the commercial banks need to keep certain amount in respective accounts, if not penalties will need to pay to RBI. If RBI increase the SLR, Commercial banks need to deposit more money in their account, if RBI decrease the SLR, it will happen vice versa.
Repo rate & Reverse Repo Rate
Repo rate is one of the tool, in which the commercial banks lending money from RBI as a short term loan. By adjusting the Repo rate, RBI can regulate the money supply. If RBI increase the repo rate, interest which provide commercial banks to the public will increase, therefore money supply will decrease. If RBI decrease the repo rate, interest which provide commercial banks to the public will decrease, therefore money supply will increase.

Reverse repo rate is the rate in which RBI take a loan from commercial banks for their needs, that interest will be paid based on this rate.
HOW THIS POLICY RELATED TO STOCK MARKET
Based on the above information, money supply is regulating by adjusting the interest rates. Therefore if RBI decrease the interest rates, borrowing of money will increase by the public, individuals, corporate etc.,, therefore increasing in investing, there fore business will develop resulting in increase in shares in stock market.

If RBI increase the interest rates, borrowing of money will derease by the public, individuals, corporate etc.,, therefore decreasing in investing, there fore business will less in development resulting in decrease in shares in stock market.