RBI shocks; leaves repo and CRR rate unchanged

In what has come in as a big shock to markets and industry, the Reserve Bank of India left the repo rates and cash reserve ratio unchanged, in its Monetary Policy Review declared today.

The inaction on the part of the RBI caused mayhem in the stock markets, which sold off sharply, while bond prices staged a smart rally. Fortunately, the RBI is likely to continue its open market operations, which will infuse some liquidity into the system.

Economists and analysts had largely been expecting a 25 basis points cut in the repo rate and a similar cut in the CRR rate. However, the RBI in a move to balance between growth and inflation, tilted towards inflation, and hence decided to leave rates unchanged.

The announcement of the policy saw a sharp drop in the stock markets, with the Sensex dropping into negative territory from higher levels of almost 1% witnessed in early morning trades.

Repo rates are the rates at which RBI lends to banks and cash reserve ratio is a percentage of deposits that the banks have to keep with the RBI. A drop in these rates, generally (not necessarily) lead to a drop in interest rates, making loans cheaper.

The Reserve Bank of India has said that the future direction of the markets would depend on growth-inflation dynamics. The central bank has said that liquidity management remains a priority, while the current account deficit is high despite slowdown in growth.

Maintenance of a status quo by the RBI means that interest rates are unlikely to go down in a hurry. This is not good news for borrowers, while for retired individuals who depend on income from fixed interest bearing instruments, it is time to cheer the RBI decision.

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