RBI cuts Repo Rate and CRR by 25 basis points!

What investors and analysts waited with bated breath for a rate cut by the RBI has eventually ended in the positive. The central bank today, after nine months, lowered its policy repo rate by 25 basis points (bps) to 7.75 percent.

Further easing is possible in the future depending on whether the bulbous fiscal deficit is brought under control by the government's upcoming budget or not. The Indian economy has posted its slowest annual growth in a decade. The rate cut is done to boost a decaying Indian economy towards growth as well as controlling a possible flaring inflation. RBI has been cautious in its approach of not affecting external stability with its policy moves.

What was unexpected from the RBI is its reduction of the cash reserve ratio (CRR) by 25 bps to 4 percent. This move will help infuse into the banking system an extra Rs. 180 billion.

RBI Policy Reviews have always been key to move Indian Stock Market like today.

Repo rate hold by the RBI!

RBI’s holding of the repo rate is no big surprise as it was already reported that a rate cut was ‘highly improbable’ though India's main inflation gauge WPI rose 7.24 percent from a year earlier against the expectations of 7.6 percent. Of course, a rate cut of 8 percent is possible in January and leading international economists forecast a series of rate cuts in 2013 and this will definitely show gains in the BSE Banking Index. Thanks to possible easing of inflation in the next few months!

The RBI kept interest rates on hold though the government put pressure on the central bank to reduce borrowing costs. The bank assured of a rate cut in January and shifted focus towards enhancing a flagging Indian economy. BSE Banking Index at NSE went up with both the sensex and nifty trending at a moderate rate.

One of the reasons for the RBI holding the repo rate was the low GDP growth (below 6 percent) posted for the past three quarters.