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.