The Reserve Bank of India (RBI) on Wednesday decided to hold the policy rate at 6.25 per cent citing uncertainties emanating from both domestic and global developments.
The central bank said the decision to keep the rates unchanged was unanimously taken by all the six members of the monetary policy committee (MPC).
“The MPC was of the view, given a reduction of 25 bps rate in October, which cumulated to the reduction of 175 bps since January 2015 – a further reduction in the policy rate is not warranted at this juncture,” RBI Governor Urjit Patel said at the news conference held in Mumbai to brief bimonthly policy review.
Mr. Patel said international crude prices are rising and there is continued firmness in some of the food items.
While the RBI said its accommodative stance of the monetary policy continues, it has refrained from giving any indication on when further rate cuts can be expected.
"It is appropriate to look through the transitory but unclear effects of the withdrawal of specified bank notes (SBNs) while setting the monetary policy stance. On balance, therefore, it is prudent to wait and watch how these factors play out and impinge upon the outlook,” the RBI said in the policy statement.
CRR requirement withdrawn
There was some relief to banks as RBI has withdrawn the 100 per cent cash reserve ratio requirement that was imposed end of last month. The central bank said the decision to withdraw 100 per cent CRR requirement was taken as the government had announced Rs 6 lakh crore of bonds, issued under market stabilization scheme, to mop up excess liquidity.
Stocks, bonds tumble
While markets were surprised, the government appreciated the stance of the central bank. “This is a bold and brilliant call taken at the right time. These are times of unusual volatility and also the time to ensure that there is continuity and stability of policy in the foreign exchange market,” said Chief Economic Adviser Arvind Subramanian.
The hawkish stance made both bond and equity market jittery with the yield on the 10 year benchmark government bond hardened 21 basis points to close the day at 6.41 per cent.
“Despite the surprise today, we believe the RBI’s decision to stand pat is a prudent one,” said Nomura economist Sonal Verma in a note to its clients.
“In the light of improved banking system liquidity, the focus needs to be more on the transmission of the rate cuts already delivered, rather than lowering the signalling rates much further,” she said.
The benchmark Sensex, which was trading in positive territory for most part of the day, took a sudden u-turn after the rate decision was announced at 2.30 pm. The 30-share index plunged nearly 230 points to touch an intra-day low of 26,164.82. It managed to recover partially to close at 26,236.87, down 155.89 points or 0.59 per cent.
The broader Nifty of the National Stock Exchange (NSE) lost 41.10 points or 0.50 per cent to close at 8,102.05.
Banking stocks bore the maximum brunt as the BSE Bankex lost more than 1 per cent or 225 points. While Axis Bank and Bank of Baroda lost more than 2 per cent each, HDFC Bank, ICICI Bank, SBI, and PNB all lost between 1-2 per cent each.
