RBI, goes, kill, one, more, time, cuts, rates, 100, bps

Reserve Bank of India, India’s central bank has decided to give one more shot to the markets. It has reduced the key rates by 100 basis points or 1 %. This move is totally expected by the markets. The interest rates are significantly higher when compared to other markets.

Countries across the globe has cut the interest rates and provided stimulus packages for the local economies to flourish. India on the other hand has shown restraint in cutting the interest rates. It is doing in installments. It still do not have a stimulus package announced.

The new parameters will be as follows :

1. Repo rate is at 6.5%. This is the rate at which RBI lends to commercial banks like SBI and ICICI. This would mean the banks can borrow money at cheaper rates which can trickle down to the consumers in the form of reduced interest and home loan rates. However, the previous cuts did not show any significant reduction in the interest rates from the banks. This is not based on research but based on the calls I get from the tele-marketers.
2. Reverse repo rate is at 5%. This is the rate at which RBI sucks out excess liquidity in the system. This will be tinkered usually to tame inflation. Since inflation is going south, tweaking this a bit would do no harm.
3. Credit Reserve Ratio unchanged at 5.5 %. This is the ratio of cash a bank has to keep with RBI to meet the customer withdrawals and stay solvent. Typically this will remain unchanged. Lower CRR means the banks might go into bad lending practices and thus can become bankrupt. China has a CRR of 16.5% for its banks. US, UK, Australia and Pakistan has a CRR of 0.
4. Statutory Liquidity Ratio (SLR) unchanged at 24%. This is the amount of money a bank has to keep with RBI to meet immediate liability demands. This can be in the form of cash, gold or approved securities. This would ensure bank’s solvency and increase investment in government securities. This is usually not altered.

Typically, the interest rate cuts increase the consumer spending and thus fuel the economy. But it also stokes inflation. Since the Inflation has come down to 8.4%, such a step by RBI is understandable. Besides, the reduction in Petrol and diesel prices would mean the inflation will come down to 5% in the next 2 months.

Also, obvious is the fact that government is concerned with growth and not inflation. It was too late to realize this when the whole world have realized it much sooner. For example, China has continued to cut rates and released a stimulus package of $580+ billion dollars in spite of rising inflation.

I like the way the events are orchestrated :

1. Petrol is cut by 5 rupees and Diesel by 2 rupees. (From yesterday mid-night)
2. Interest rate cut by 100 bps. (Today)
3. Stimulus package to be unveiled tomorrow (or on Monday)

Those are a booster dose, Injection and a tablet respectively in that order for the markets.

I hate to predict but here is one. Sensex will rise by 400 points*.

*Conditions apply - Unless something else happens from today and Monday

*Image source : soham_pablo via flickr.