As was largely expected the Reserve Bank of India cut repo rates by 25 basis points, which was in line with expectations. What took the markets by surprise was the hawkish statement from the RBI, which hinted that there maybe no room for further easing.
Today's drop was largely on sharp falls in Consumer Price Inflation (CPI) in the last few months. The Cash Reserve Ratio (CRR) was left unchanged at 4 per cent. Read more on CRR here
The Reserve Bank of India also hinted that the policy rates were frontloaded, which means the next few months could see a pause in interest rate cuts.
"A conservative strategy would be to wait, especially for more certainty on both the monsoon outturn as well as the effects of government responses if it turns out to be weak. With still weak investment and the need to reduce supply constraints over the medium term to stay on the proposed disinflationary path (to 4 per cent in early 2018), however, a more appropriate stance is to front-load a rate cut today and then wait for data that clarify uncertainty. Meanwhile banks should pass through the sequence of rate cuts into lending rates," the RBI said in a release.
It further added, "The risks to inflation identified in April, three still cloud the picture. First, some forecasters, notably the IMD, predict a below-normal southwest monsoon. Astute food management is needed to mitigate possible inflationary effects. Second, crude prices have been firming amidst considerable volatility, and geo-political risks are ever present. Third, volatility in the external environment could impact inflation."
Stock markets did not take the frontloading comments lightly with banking stocks plunging after the official statement. Stocks like IndusInd Bank, Yes Bank, State Bank of India, Bank of Baroda and Punjab national Bank all fell.
The Bank Nifty was down one per cent in trade.
Economists had predicted that the central bank might sound hawkish given external worries like Greece, Crude Oil and domestic worries like Monsoon being a threat to inflation.
At least for now the next few months would be see a pause in interest rates.