Impact of CRR hike on stock market

Cash reserve Ratio (CRR) in India is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks.

For example if bank A collects 10000/- deposit from you then out of the 10000/- he has to keep Rs 500 at the rate of 5% with the RBI. The net amount left with the bank will be 9500/- . if the CRR is getting hiked then RBI will suck the money from the system in order to meet the trade deficit. Same time the bank will have money supply deficit to meet all the loan demand. To fill this money supply deficit banks will increase interest rates on Fixed deposits to get more deposits from customers, increase home loan, Auto, other loans to industries to pass its burden to borrowers.

The increase in CRR rate will directly impact the housing, experts, banks, automobile sell figure etc in the short term. Since market is more sensitive towards the short term reactions it can lead to the fall in the above sectors. The real jerk will be felt in the monthly sales figure  and turnover of the above mentioned sectors. Continuous increase in the CRR may impact the quarterly profitability of the above sectors. Second point is if it is inline with the increase in the interest rate in the cash deposits then it will directly impact the stock market since the big money will flow out from the high risk sector to the low risk sector resulting low participation in the market.

Repo Rate: Repo rate is the rate at which our banks borrow rupees from RBI. This facility is for short term measure and to fill gaps between demand and supply of money in a bank .when a bank is short of funds they borrow from bank at repo rate and if bank has a surplus fund then the deposit the funds with RBI and earn at Reverse repo rate .

Reverse Reporate: is the rate which is paid by RBI to banks on Deposit of funds with RBI.A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive. To borrow from RBI bank have to submit liquid bonds /Govt Bonds as collateral security ,so this facility is a short term gap filling facility and bank does not use this facility to lend more to their customers