Correlation

between Central
Bank Repo Rate
and Market
movements
Determined by
RBI
Reverse repo
rate
Short term loan

Short term loan %

% Repo rate
Determined by
RBI
 Reverse repo rate Repo rate
Decrease Decrease
Increased Increased

LIQUIDITY

Low High
Repo, reverse repo increased Repo, reverse repo decreased
Repurchase agreement
Bank promises to
repurchase the
securities on a
predetermined date at a
predetermined price
Short term loan

% Repo
rate
RBI purchases the security at a
discounted price

Calculated based on repo rate

 Reverse repo
rate

%
Reverse repurchase

Short term loan

agreement
Bank promises to
resell the securities on
a predetermined date
RBI sells the securities at a
at a predetermined
discounted price time

Calculated based on reverse

repo rate
 Inverse relation between market price
How and and interest rates.
why
markets
Reduction in spending and slow down in
react to expansion.
change in
interest Reduction in interest rates implies more
rates. disposable income: which translates to
improvement in demand for equities.
 Increase in
interest
Bonds: FDs:
indirectly
Share similar relationship as
stocks.
Share direct relation with
interest rates.
promotes
Existing bonds lose value.
Businesses issue bonds to
Lower repo rates imply less
stress on meeting capital
investment in
raise funds. requirement.
other
avenues:
EXAMPLES:
 In theory, one can conclude that the change in
repo rates of a country has an inverse effect on the
performance of the market. However, when taken
Conclusion in totality one cannot fully claim that this effect is
solely due to the interest rates, as other
externalities also come into play affecting the
performance of the market.