1) Hike in repo rate
The Reserve Bank of India (RBI) has hiked the repo rate from 7.5 per cent to 7.75 per cent with immediate effect. This is the second time in succession the RBI has hiked the repo rate, in a move aimed at taming inflation. The repo rate is the rate at which the RBI lends to banks and any hike in these rates signal an upward bias in interest rates. However, in today's review the RBI has announced other easing measures, which should ensure that rates do not rise.
2) Marginal standing facility reduced
"We have reduced the marginal standing facility (MSF) rate by 25 basis points from 9.0 per cent to 8.75 per cent with immediate effect," the RBI has stated in a release.
Marginal standing facility is a window that allows scheduled commercial banks to borrow overnight from the central bank a maximum amount of 1% of total time and demand liabilities.
This will lower the cost of funds for banks and push short term interest rates lower.
3) Liquidity improved
The liquidity provided through term repos of 7-day and 14-day tenor has been increased from 0.25 per cent of net demand and time liabilities (NDTL) of the banking system to 0.5 per cent with immediate effect. This is good news for banks as they may now have more access to funds.
4) Bond yields drop
Government bond yields fell marginally following the RBI move, as the central bank improved liquidity in the banking system.
5) Banking stocks rally
Banking stocks rallied in trade today with ICICI Bank gaining 2.56%, while Yes Bank rallied 2.5%, while Bank of Baroda and Syndicate Bank also rallied 2% each.