The RBI left interest rates unchanged but cut the cash reserve ratio for banks, saying the primary focus of monetary policy remains fighting inflation, days after the government unveiled a spree of reforms to boost growth and improve its fiscal position.
However, the markets don't seem to be very happy with RBI's move as the Sensex is up only 50 points now at 18500 levels, while the Nifty is up only 24 points at 5602. The rupee and bond prices too trimmed gains after the Reserve Bank of India kept interest rates on hold, dashing hopes the central bank would follow up with action of its own after the government announced fiscal reform measures.
The 10-year bond yield rose 5 basis points to 8.17 percent from beforehand and was down 1 bps on the day. The one-year swap rate rose 8 bps to 7.68 percent from levels before the decision, according to traders' quotes, though the rate was still down about 5 bps from Friday's close.
The RBI left the policy repo rate at 8 percent, in line with expectations but cut the cash reserve ratio, the share of deposits banks must keep with the central bank, by 25 basis points to 4.5 percent in a move it said will inject about Rs 17000 crore of liquidity into the banking system.
The central bank's stance indicates that it is worried about the inflationary fallout of the diesel price hike, and would wait for some more time before softening its stance on interest rates.
A Prasanna, ICICI Securities told Reuters that "The RBI felt compelled so they have chosen the least harmful way of responding by a token CRR cut. I think what the statement is telling us is that the RBI is still worried about inflation, although it's more hopeful of government steps that over the medium term inflationary pressures will come down. In the near term, however given the pressures on inflation, scope for a rate cut in the next policy continues to be low."
"The market might see a knee-jerk reaction to begin with, but on a long-term basis the decision is positive and there is a clear message that RBI is an independent body and is not coming under the government's pressure. The decision is an image boosting act by the central bank, said RK Gupta MD at Taurus Mutual Fund.
"In April, the Reserve Bank implemented a frontloaded policy rate reduction of 50 basis points on the expectations of fiscal policy support for inflation management alongside supply-side initiatives for addressing the deceleration of investment and growth. As these expectations did not materialise and inflation remained firmly above 7.5%, the Reserve Bank decided to pause in its policy easing in the mid-quarter review of June," the regulator said today.