RBI Surprises With Interest Rate Cut; Holds CRR Steady

Updated: Wednesday, March 4, 2015, 9:02 [IST]

The Reserve Bank of India (RBI) in a surprising move cut the repo rate (interest rate at which it lends to banks) by 25 basis points to 7.5% to 7.75% with immediate effect, doing so for the second time in two months outside the policy review.

The RBI, however, kept the CRR rate steady.

RBI Surprises With Interest Rate Cut; Holds CRR Steady

While cutting rates the RBI said, "While the next bi-monthly policy statement will be issued on April 7, 2015 the still weak state of certain sectors of the economy as well as the global trend towards easing suggests that any policy action should be anticipatory once sufficient data support the policy stance. Second, with the release of the agreement on the monetary policy framework, it is appropriate for the Reserve Bank to offer guidance on how it will implement the mandate."

The Country's central bank has also warned that further easing would depend on data. This makes further interest rates cut in the next few months difficult to come by.

"Further monetary actions will be conditioned by incoming data, especially on the easing of supply constraints, improved availability of key inputs such as power, land, minerals and infrastructure, continuing progress on high-quality fiscal consolidation, the pass through of past rate cuts into lending rates, the monsoon out turn and developments in the international environment," the RBI has said.

The central bank also said that it would continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking
system through auctions.

Today's surprise could see a sharp surge in banking stocks, particularly the PSU banking space. Indian stock markets are expected to open sharply higher with the Nifty expected to trade above 9000 points and the Sensex closer to 30,000 points.

The rupee is also expected to open higher and bond yields are expected to fall.

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