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6 key takeaways from the RBI Monetary Policy
1) Repo Rates cut
Clearly, very few economists and analysts were expecting a repo rate hike. Repo rates are rates at which the RBI lends to banks and any increase in these rates lead to higher lending rates, which is not good for economic growth. However, hike in rates is needed to tame inflation. One reason why the RBI hiked rates.
2) Hawkish tone on inflation
The Monetary policy statement suggests that the RBI will continue to battle inflation, never mind lowering growth.
"WPI inflation, which had eased in Q1 of 2013-14, has started rising again as the pass-through of fuel price increases has been compounded by the sharp depreciation of the rupee and rising international commodity prices.
The negative output gap will exercise downward pressure on inflation, and the process will be aided as supply side constraints, especially relating to food and infrastructure, ease. However, the current assessment is that in the absence of an appropriate policy response, WPI inflation will be higher than initially projected over the rest of the year.
What is equally worrisome is that inflation at the retail level, measured by the CPI, has been high for a number of years, entrenching inflation expectations at elevated levels and eroding consumer and business confidence. Although better prospects of a robust kharif harvest will lead to some moderation in CPI inflation, there is no room for complacency," the RBI said in its policy statement.
3) MSF rates stand reduced
The RBI today also reduced the marginal standing facility (MSF) rate by 75 basis points from 10.25 per cent to 9.5 per cent with immediate effect.
Under the MSF banks were borrowing from the RBI at repo rate, plus 1 per cent, which effectively meant 8.25 per cent. But, with effect from July 17, banks would have been borrowing at 10.25 per cent. This rate now stands reduced by 75 basis points, as against market expectations of 0.25%.
4) Daily CRR rate reduced
The RBI also reduced the minimum daily maintenance of the cash reserve ratio (CRR) from 99 per cent of the requirement to 95 per cent effective from the fortnight beginning September 21, 2013, while keeping the CRR unchanged at 4.0 per cent.
5) Stock markets tank
The Sensex which had rallied as much as 615 points on Thursday gave up most of the gains and fell 515 points, following the RBI decision to hike rates.
6) Banking stocks hammered out of shape
Banking stocks were hammered out of shape following the RBI move to hike rates. Yes Bank was hammered 11%, while Punjab National Bank lost 9%, Bank of India 8%, Axis Bank 7% and State Bank 5.25%.
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