How Reserve bank influences Share market movements:

The Reserve bank (of each country) has a special duty to monitor money circulation in the economy. To regulate the market behaviour the Reserve bank applies few techniques like increase/decrease interest rate (their own lending rates to the commercial banks).

 

Reserve banks adopt a technique called “open market operations”. This means the Reserve bank will “sell” government bonds in the share market to reduce money circulation in the economy (i.e. as you buy the government bonds you reduce the cash you have at your disposal) or ‘buy” government bonds and guilt edged securities when the Reserve bank wants to pump in more money in market circulation.

 

This way, when Reserve bank buys bonds and stocks, there is an “artificial” demand in share market that makes the share market index to go up. Reserve bank  buys the stock and creates demand.

 

This entices the public to get tempted that the market is recovering and they invest the money they have on hand, on some stocks. This way, Reserve bank tries to reduce cash circulation in individual’s hands.

 

Another technique called ‘Variable reserves Ratio” is used. This means that each branch of each bank in a country, has to maintain a portion of the deposits from customers as ‘Reserve’ with Reserve bank. Lend the remaining to their borrowers. Reserve bank increases this reserve ratios (making banks to maintain more money with reserve bank from each deposit collected) when Reserve bank wants to reduce money circulation, and vice versa.

 

These are artificial method of regulating the market behaviour, though legally permitted, but have the impact of fooling the unsuspecting/ uninformed individuals to get in to a trap believing that the market is recovering or going up, when in fact it could be vice versa.