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The Reaction of the Indian Economy and Stock Market to the RBI’s Repo Rate Hike 09.05.2022

Local Stocks Cover The Reaction of the Indian Economy and Stock Market to the RBI’s Repo Rate  – Official Olymp Trade Blog

RBI increased the Repo rate from 4% to 4.4%. How will Sensex and Bank Nifty respond?


Interact with the dashed blue word and green spot on images to get additional details and explanations.


Factors Behind the RBI’s Repo Rate Hike

Repo Rate Impact May Create Downward Pressure in the Indian Stock Market

The increase of the Repo rate by 40 bps from 4% to 4.4% may have a large-scale impact on the economy of India. Generally, when the Repo rate increases, loan interest rates also rise. As a result, corporations have to pay more on the funds they borrow for business expansion. Therefore, it reduces their profitability and earnings per share. Consequently, stocks go down. Similarly, retail loans for homes, cars, education and other consumer purposes also become more expensive and cause weaker consumer spending and lower GDP.

Therefore, it will be safe to state that the Repo rate increase may have a negative impact on the Indian economy and stock market. Still, the RBI took that step. The primary reason is that it wanted to halt inflation growth.

Since 2018, it’s the first time the RBI has hiked the Repo rate to cool down the increasing inflation. Essentially, increasing the Repo takes money out from the economy. Naturally, it leaves less of it for the consumers and corporations to spend. As a result of that, inflation normally goes down.

Now, let’s check how Sensex and Bank Nifty have reacted to that so fat.

RBI Repo Rate Yearly Chart - Olymp Trade - Expert Review - 10.05.2022
Fig.1. Reserve Bank of India’s Repo rate

Sensex May Keep Dropping

Sensex may fall further. On the daily time frame, Sensex of 55,000, it may drop to the secondary support range of 52,500-53,200 and further below in case of a stronger correction.

We believe Sensex will keep going down in the upcoming weeks. While range-bound trading in the downward direction is also a possibility, upside movement is unlikely.

Sensex on a Daily Chart - Olymp Trade - Expert Review - 10.05.2022
Fig. 2. Sensex on a Daily time frame

Impact on Bank Nifty

The Indian banking industry may go into a downtrend. The Indian banking Industry may most feel the impact of the RBI’s Repo rate increase. Mainly, the hike may push the country's commercial banks to increase the interest rates on the loans they provide. Bank Nifty may follow the Sensex’s downtrend. The range of 34,000-34,200 may serve as a key support level. If Bank Nifty breaks it on the way downwards, the next downward target of 32,250 may be challenged in the upcoming weeks.

Bank Nifty’s Daily Chart - Olymp Trade - Expert Review - 10.05.2022
Fig. 3. Bank Nifty on a Daily time frame

Risk warning: The content of the article does not constitute investment advice and you are solely responsible for your trading activity and/or trading results.